THE  BANK  AND  THE  TREASURY 


"...  About  twenty-five  years  ago,  Lord  Revelstoke,  at  the  head  of 
the  great  firm  [Baring  Brothers],  was  visiting  a  German  watering-place, 
where  he  met  one  of  our  leading  American  bankers.  Naturally,  their 
conversation  drifted  into  a  discussion  of  the  financial  situation,  and  in 
the  course  of  the  talk,  Lord  Revelstoke  remarked  that  he  intended  during 
the  next  ten  or  fifteen  years  to  enter  extensively  into  modern  financial 
banking.  From  that  time  the  character  of  the  business  of  the  Barings 
began  to  change,  and  from  being  the  greatest  merchants  in  commercial 
credits,  they  put  their  resources  more  and  more  into  fixed  forms  of 
investment,  into  speculative  ventures  in  securities  and  into  the  promotion 
of  financial  enterprises.  What  was  the  result?  In  1890  the  .  .  .  world 
was  startled  by  rumors  reflecting  upon  the  credit  of  this  house,  hitherto 
considered  invincible,  and  its  failure  was  only  averted  by  the  most  stren- 
uous efforts  of  the  Bank  of  England,  with  the  aid  of  the  strongest  bankers 
of  London.  .  .  . 

"We  refer  to  this  striking  chapter  in  financial  history  simply  because 
it  illustrates  one  of  the  peculiar  dangers  of  our  own  times.  Unques- 
tionably, the  special  temptation  to  which  our  banks  are  now  subjected 
is  the  temptation  to  turn  from  commercial  to  financial  banking;  to 
change  from  the  buying  and  selling  of  commercial  credit  into  investments 
in  securities  and  loans  extended  to  promote  financial  enterprises;  in 
short  to  change  their  business  from  that  of  commercial  banks  to  that  of 
finance  companies. 

"The  process  of  concentration  in  banking  which  is  going  on  would 
possess  little  danger  were  it  not  accompanied  in  so  large  a  degree  by  this 
change.  The  house  of  the  Barings  was  a  striking  example  of  concen- 
tration in  banking.  Its  business  encircled  the  globe;  its  wealth  was 
enormous,  and  so  great  were  its  transactions  that  even  at  the  time  of  its 
trouble  in  1890  its  holdings  of  paper  amounted  to  $100,000,000.  But 
when  it  began  to  divert  its  interest,  formerly  directed  almost  exclusively 
to  commercial  credits,  and  began  to  throw  the  weight  of  its  prestige  and 
resources  into  the  field  of  investment,  speculation  and  promotion,  then 
the  power  of  its  concentration  of  capital  became  a  menace  to  the  world. 
In  the  same  way  concentration  in  banking,  which  is  going  on  at  such 
rapid  rate  in  New  York,  would  not  be  open  to  much  or  any  criticism  if 
such  concentration  .  .  .  was  employed  for  the  purpose  of  facilitating 
the  commerce  of  the  country  instead  of  being  used  in  purely  financial 
undertakings."  —  The  Wall  Street  Journal,  New  York,  Oct.  29, 
1904. 


THE    BANK 

AND 

THE    TREASURY 


By 
FREDERICK  A.  CLEVELAND,  Ph.D. 

PROFESSOR    OF    FINANCE    IN    THE    SCHOOL    OF 

COMMERCE,  ACCOUNTS,  AND   FINANCE, 

NEW  YORK  UNIVERSITY 


LONGMANS,   GREEN,   AND   CO. 

91  AND  93  FIFTH  AVENUE,  NEW  YORK 
LONDON  AND  BOMBAY 

1905 


Copyright  190; 
By  Longmans,  Green,  and  Co. 

All  rights  reserved 


The  Plimpton  Press  Norwood  Mass. 


T;  i^ 


1^ 


PREFACE 

This  is  not  a  general  treatise  on  money  and  bank- 
ing.    The  intention  is,  rather,  to  contribute  some- 
thing to  a  single  subject  of  national  interest  —  the 
%  problem  of  providing  a  more  " sound  "  and  "elastic" 

Or; 

5i  system  of  current  credit- funds.  In  recent  discus- 
sion of  currency  and  banking,  it  has  seemed  that 
a  too  narrow  view  has  been  taken :  By  one  class  the 

^  assumption  is  made  that  ''issues"  of  Government 
are  capable  of  affording  the  "elasticity"  desired; 
another  has  attempted  to  demonstrate  that  in  an 
** assets-bank-currency"  is  to  be  found  the  nostrum 
for  financial  ills.  Both  classes  have  failed  to  see  that 
our  financial  superstructure  rests  on  two  distinct  and 
widely  separated  pillars  —  the  Independent  Treas- 
ury, and  the  Commercial  Bank;  that  each  has  its 
own  burden  and  responsibilities;  that  the  one  is  an 
institution  of  public-money-issue,  the  other  an  insti- 
tution of  private-credit ;  that  the  one  supports  a  large 
issue  of  credit-money  upon  a  "gold  reserve"  for  its 
foundation,  the  other  a  still  larger  issue  of  bank- 
credit  upon  a  "lawful  money  reserve."  Upon  these 
two  pillars  is  rested  a  superstructure  of  private-credit 
incalculable  in  amount  —  a  magnificent  pile,  to  the 


386422 


vi  PREFACE 

building  of  which  nearly  every  business  transaction 
of  the  immediate  past  has  contributed  and  which  in 
its  long-time  credit  obligations  projects  itself  into  the 
future,  involving  to  a  greater  or  less  extent  the  pro- 
spective business  of  the  next  fifty  years.  It  is  this 
towering  superstructure  of  credit,  sensitive  to  the 
last  degree,  and  the  contemplation  of  the  perils  of 
a  shock  to  so  delicate  and  comprehensive  an  organi- 
zation, that  makes  a  matter  of  currency  or  banking 
reform  a  dangerous  undertaking  —  one  that  should 
be  carefully  considered  and  not  entered  upon  lightly 
from  motives  of  political  expediency. 

During  the  last  two  decades  currency  and  banking 
questions  have  been  prominent  in  the  councils  of  the 
nation,  and  many  radical  changes  have  been  pro- 
posed. Every  sudden  institutional  or  social  change 
must  of  necessity  be  accompanied  by  disturbances 
due  to  breaking  bonds  of  custom  and  to  the  introduc- 
tion of  certain  elements  of  the  unknown  as  premises 
for  judgments  concerning  the  future.  This  fact,  to- 
gether with  the  known  sensitiveness  of  the  credit 
structure,  suggests  that  whatever  the  financial  re- 
forms to  be  undertaken,  we  break  with  the  present  no 
further  than  is  necessary  to  accommodate  imme- 
diate needs.  Sweeping  changes  would  amount  to 
financial  revolution,  and  proposals  of  this  kind 
should  be  peremptorily  dismissed. 

The  suggestion  that  we  should  at  once  abolish  one 
of  the  pillars  upon  which  the  national-credit  super- 


PREFACE  VII 

structure  rests  (the  United  States  Sub-Treasury) 
brings  with  it  nothing  but  a  picture  of  national  dis- 
tress. No  change  of  this  kind  could  safely  be  under- 
taken till  the  present  burden  of  credit-money  had 
been  removed  from  the  capital;  there  must  first 
have  been  a  complete  revision  of  the  monetary  sys- 
tem —  a  system  that  we  have  labored  a  century  to 
bring  to  its  present  state  of  "soundness"  and  which 
in  its  architectural  plan  is  yet  scarcely  completed. 
The  proposition  to  throw  the  whole  financial  burden 
on  the  commercial  bank,  and  to  strengthen  this  by  a 
scheme  of  centralization,  carries  with  it  the  same 
certainty  of  disaster,  unless  the  change  be  gradual, 
and  unless  also  every  shift  of  stress  be  made  after  a 
careful  calculation  of  probable  results. 

And  this  calculation  should  be  something  more 
than  philosophical  conjecture.  It  should  be  based 
on  experience.  In  the  preparation  of  this  work  it 
has  been  the  constant  endeavor  to  measure  carefully 
every  salient  point  of  the  present  financial  structure, 
to  take  into  account  the  monetary  and  banking  ex- 
perience of  the  past,  and,  having  in  view  this  expe- 
rience, to  suggest  certain  results  that  may  be  attained 
in  the  direction  of  increased  soundness  and  elasticity 
by  slight  changes  in  the  organic  relations  of  the  sys- 
tem with  which  we  are  now  working  and  which  in 
all  its  details  we  may  understand.  In  making  these 
suggestions  it  has  been  the  underlying  belief  that 
experience  is  the  only  safe  guide  to  judgment  —  that 


viii  PREFACE 

evolution  and  not  revolution  should  be  the  principle 
of  financial  reform. 

Any  attempt  to  analyze  national  banking  condi- 
tions and  the  results  of  banking  and  currency  opera- 
tions must  necessarily  be  based  on  published  reports. 
For  the  purpose  of  a  better  understanding  of  financial 
relations  the  concrete  statistical  data  thus  found  have 
been  collected,  and  co-ordinated,  and  reduced  to 
charts.  It  is  a  matter  of  regret  that  more  of  this 
history  and  experience  cannot  be  graphically  dis- 
played in  a  publication  of  this  kind.  Much  of  val- 
uable suggestion  has  been  obtained  from  letters  of 
transmission,  reports  and  published  documents  of 
the  Treasury  Department  and  of  the  standing  com- 
mittees of  the  House  and  Senate.  The  public  utter- 
ances and  views  of  public  men  and  of  leading  bank- 
ers, of  editorial  and  monograph  writers,  have  lent 
much  color  to  thought  in  the  formulation  of  working 
hypotheses  for  the  consideration  of  available  material. 
A  proper  appreciation  of  the  problem  of  increased 
"soundness"  and  of  ''elasticity"  in  credit  funds, 
however,  rests  largely  upon  the  analytical  methods 
and  conclusions  of  public  accountancy.  The  ques- 
tion even  turns  on  relations  of  current  assets  to  cur- 
rent liabilities  of  institutions  issuing  credit  —  on  re- 
sources ''available"  for  payment  of  credit  obligations 
outstanding.  Without  in  any  way  ascribing  to  others 
opinions  here  expressed  or  conclusions  reached,  it  is 
due  to  say  that  in  getting  at  a  proper  basis  for  the 


PREFACE  IX 

consideration  of  this  problem,  my  indebtedness  is 
chiefly  to  my  associates,  Mr.  Ehjah  W.  Sells,  Mr. 
Charles  S.  Ludlam,  Mr.  Deroy  S.  Fero,  and  Mr. 
Homer  A.  Dunn,  whose  long  professional  experience 
in  the  analysis  of  financial  data  has  made  them  in- 
valuable critics.  In  this  relation,  I  also  wish  to  ex- 
press gratitude  to  Mr.  Edward  P.  Moxey,  for  the 
liberahty  with  which  he  has  given  his  time,  and 
who  in  his  views  has  reflected  the  experience  of 
years  of  service  as  Government  expert  and  as  pro- 
fessional bank  accountant;  also  to  Mr.  Herbert  G. 
Stockwell,  who  has  ever  been  kind  and  generous  in 
suggestion  and  criticism  concerning  matters  falling 
within  his  acquaintance.  Further,  I  wish  to  express 
gratitude  to  Mr.  Charles  G.  Dawes,  whose  experi- 
ence as  Comptroller  of  the  Currency,  and  more 
recently  as  President  of  the  Central  Trust  Com- 
pany of  Illinois,  has  given  to  the  author  much 
encouragement  when  reflected  through  words  of 
approval  and  generous  interest  in  results. 

A  considerable  part  of  the  matter  contained  in 
some  of  the  chapters  following  has  appeared  in 
periodicals  and  in  the  published  proceedings  of  the 
Pennsylvania  Bankers'  Association.  For  permission 
to  use  such  portions  as  have  been  brought  out 
periodically,  I  am  under  obligation  to  the  publishers 
of  The  North  American  Review,  the  Annals  of  The 
American  Academy  of  Political  and  Social  Science, 
The  Financier,  The  Capitalist,  The  Railway  World, 


X  PREFACE 

and  The  (New  York)  Mail  and  Express.  The 
collection  and  classification  of  data  and  the 
compilation  of  many  statistical  tables  and  summaries, 
not  here  shown  but  on  which  reasoning  is  based  and 
from  which  conclusions  are  drawn,  are  the  contribu- 
tion of  my  wife;  except  for  her  active  interest  and 
intelligent  devotion  to  the  subject  this  published 
result  would  not  have  been  possible  without  sacrifice 
of  other  interests  demanding  attention.  To  her  I 
am  further  indebted  for  assuming  responsibility  for 
the  most  trying  of  all  details  —  manuscript  correc- 
tion and  proof-reading.  F.  A.  C. 

October  15,  1904. 

30  Broad  Street,  New  York. 


CONTENTS 


CHAPTER  PAGE 

I.  Commercial  Banking  and  Speculation  —  A 

Financial  Retrospect i 


II.  The  Use  of  Commercial   Bank-Credit  in 

Lieu  or  Industrial  Capitalization      .     .       13 

III.  The   American   System   of  Currency   and 

Banking 29 

IV.  National  Credit-Money  and  the  National 

Bank 41 

V.  The  Demand  for  a  "  Sound  "  and  "  Elastic  " 

System  of  Bank-Credit 54 

VI.  The  Relation  of  Bank  Capitalization  to 

THE  Problem  of  Elasticity 67 

VII.  The  Public  Control  of  Commercial  Banks      77 

VIII.  A  Point  of  Control  Not  Adequately  Cov- 
ered BY  the  National  Bank  Act    ...       99 

IX.  Character  of  A  sets  to  be  Held  by  Banks 

as  "  Invested-Reserves  " 113 

X.  Public  Dangers  in  the  Present  Equipment 

of  National  Banks 127 

xi 


xii  CONTENTS 

CHAPTER  PAGE 

XI.  Why  the  ''Unencumbered  Securities"  of 
National  Banks    are  not  Readily  Con- 

1  VERTIBLE  INTO  CaSH 1 46 

N  XII.  Dangerous  Assumptions  Made  by  the  Gov- 
ernment WITH  Respect  to  Currency  and 
Banking 157 

XIII.  Advantages  of  National  Banks  under  the 

Present  Practice  over  State  and  Private 
Banks 171 

XIV.  The  Amount  of  Elasticity  for  which  Pro- 

vision is  to  be  Made 180 

XV.  Possibilities    of    Elasticity    under    Our 

Present  National  Banking  System      .     .     193 

XVI.  Possibilities  of  Increasing  Elasticity  by 

Simple  Modifications  of  the  Present  Law    208 

XVII.  Superiority  of  the  American  Funding  Sys- 
tem over  those  of  Other  Countries       .     237 

XVIII.  Recent  Efforts  Made  to  Further  Adapt 
Our  Funding  System  to  the  Nation's 
Business  Needs 259 

Appendix  of  Documents: 

"The  Baltimore  Plan"  of  Currency  Reform,  1896    .  291 

"The  Carhsle  Plan,"  1896 293 

Fowler  Bill  of  March  15,  1897 296 

Indianapolis  Monetary  Commission  Bill,  January  6, 

1898 30^ 


CONTENTS  xiii 

Appendix  —  Continued :  page 

McCleary  Bill,  May  ii,  1898 306 

Aldrich  Bill,  December  19,  1899         311 

Secretary  Gage's  Bill 312 

Gold  Standard  Act,  March  14,  1900       .     .     .     .316 

Fowler  Bill,  April  4,  1902 .319 

Payne  Bill,  February  26,  1903 323 

Fowler  Bill,  February  26,  1903 325 

-r                            /-■  FACING 

List  of  Charts:  page 
I.  Showing  fluctuations  in  credit  compared  with 

capitalization 4 

II.  Showing  commercial  assets  compared  with  cap- 

itaUzation 8 

ni.  Showing   periods   of   increased   and   decreased 

business  activity 18 

IV.  Showing  correspondence  of  credit  fluctuations 

with  business  activity 24 

V.  Showing  fluctuations  in  money-demand  ...  60 
VI.  Showing   effect  of    national  money-demand  in 

New  York 70 

VII.  Showing  how  money-demands  reach  New  York 

through  the  reserve  system 134 

vni.  Showing  amount  of  money  borrowed  by  New 

York  banks  for  use  as  reserves        .     .      .     .  152 
IX.  Showing  how  bank-credit  is  affected  by  specula- 

I                    tion 160 

X.  Showing  how  fluctuating  demands  are  met  in 

Cotton  states 176 

r 

-VT    Showing  varying  conditions  of  credit  in  different 

1090.         sections  of  the  country 184 


xiv  CONTENTS 

List  of  Charts  —  Continued:  facing 

PAGE 

xn.  Credit  conditions  in  Corn  states  compared  with 

Cotton  states 202 

xni.  Showing  money-reserve,  securities  held,  credit 
accounts  and  commercial  assets  of  National 
Banks 244 

Tabular  Inserts: 

I.  Consolidated  statement  of  Capital  Accounts  of 

all  National  Banks  in  the  State  of  Iowa      .       94 
n.  Classified  and  consolidated  balance  sheet  of  all 

National  Banks  in  the  United  States  .     .     .     1^0 


THE  BANK  AND  THE  TREASURY 
Chapter  I 

COMMERCIAL    BANKING    AND    SPECULATION  —  A 
FINANCIAL  RETROSPECT 

December,  1890,  Baring  Brothers  announced  to  the 
world  that  the  credit  institutions  of  Europe  had  called 
a  halt.     A  period  of  promotion  and  speculation  in 

new  industrials,  in  railways,  and  in  the 
^^'^llf^tiln'^^'^    securities  of  South  America,  Australia, 

and  South  Africa  was  suddenly  ended. 
The  movement  preceding  the  failure  had  been  one  of 
expansion  —  a  struggle  for  increasing  profits;  the 
movement  following  the  failure  was  marked  by  credit 
retraction  and  trade  depression — by  efforts  to  recoup 
and  prevent  further  loss.  Although  for  two  years 
after  1890  we  had  tremendous  forces  working  in 
our  favor  (with  unprecedented  yields  of  grain  and 
higher  prices  of.  food,  stuffs,  due  to  crop  failure 
abroad),  the  detracting  influences  of  foreign  de-" 
pression  and  foreign  financial  reorganization  brought 
home  to  the  United  States  the  fact  of  over-specula^ 
tion;  in  1893  our  credit  institutions  collapsed  and 
we  followed^ tfag-^ake  of  Europe  through  a  period 
of  depression.  Our  experience  of  1893,  following 
1890,  was  similar  to  our  financial  collapse  in  il 


2  THE  BANK  AND  THE  TREASURY 

following  foreign  failures  in  1881.  September,  1902, 
brought  us  again  to  face  the  possibility  of  another 
credit  reaction. 

About  two  years  before,  another  period  of  specu- 
lation abroad  had  come  to  an  abrupt  end;  since 
that  time  Germany  and  England  had  been  passing 
through  financial  readjustment  and  reorganization. 
Here  in  the  United  States,  as  in  the  two  years  fol- 
lowing 1890,  we  had  forces  at  work  to  keep  the  wheels 
of  industry  moving  at  an  increasing 

actions  ^^^  ^^'  ^^^^'  ^^^  trade  journals  looked  upon 
this  growing  activity  as  evidence  of 
national  thrift  —  an  era  of  unprecedented  prosperity 
based  on  safe  business  methods.  Those  represent- 
ing manufacture,  merchandising,  and  transportation 
enterprise  saw  ahead  nothing  but  increasing  activity. 
But  the  experience  of  the  last  four  months  of  1902 
caused  men  in  financial  circles  to  regard  the  situation 
with  feelings  of  apprehension.  Months  of  strain  on 
our  commercial  credit  institutions,  months  of  adverse 
trade  balances,  months  of  increased  speculation  had 
put  those  in  control  of  financial  interests  on  their 

guard. 

Causes  oj  Credit  Fluctuations 

After  September,  1902,  the  financial  situation  was 
the  general  topic  of  discussion  among  bankers,  and 
these  deliberations  found  strong  expression  in  ap- 
peals to  the  National  Government  for  measures  of 
relief.     Among  those  who  early  sounded  notes  of 


BANKING   AND   SPECULATION  3 

warning  was  the  vice-president  of  the  National  City 
Bank  of  New  York.     Commenting  on  the  financial 

outlook    in    November,    1902,    Mr. 
Causes  of  credit    Vanderlip  showed  that  from  1896  to 

1962  the  increase  in  business  activity 
of  every  kind  had  been  accompanied  by  a  like  increase 
in  the  credit-accounts  (so-called  deposits)  sold  by 
banks  to  their  customers;  and  that  along  with  so- 
called  prosperity  had  been  purchases  of  commercial 
paper  by  the  banks  by  means  of  these  increased 
book-credits  or  "deposits."  He  called  attention  to 
the  fact  that  the  expansion  in  the  credit-accounts 
(deposits)  of  the  National  banks  alone,  since  1890, 
had  amounted  to  $1,300,000,000,  while  other  in- 
stitutions of  deposit  had  increased  their  credit- 
accounts  (credit-funds  offered  to  the  public  for 
current  use)  $2,300,000,000  —  a  total  increase  of 
$3,600,000,000;  within  six  years  there  had  been  an 
increase  of  credit-funds  in  the  form  of  bank  accounts, 
amounting  to  almost  double  the  entire  money  stock 
of  the  country  both  in  circulation  and  in  the  Treasury. 
But  what  had  been  the  increase  in  banking  equip- 
ment ?  What  provision  had  been  made  by  the  banks 
for  maintaining  these  increased  burdens  on  the 
credit  structure?  After  showing  that  during  the 
three  years  following  1899  the  credit  accommoda- 
tions of  National  banks  alone  had  increased  $1,300,- 
000,000,  Mr.  Vanderlip  further  commented  as 
follows:    "With  that  increase  in  liabilities  of  Na- 


4  THE   BANK  AND  THE   TREASURY 

tional   banks  in  mind,  let  us   look    at  the    assets 
representing  the  reserve  basis.     The 

^d7ffo7nflaZn  ^^^^^  ^^  ^P^^^^  ^"^  legal-tenders  held 
by  National  banks  last  month  [Octo- 
ber, 1902]  was  $508,000,000.  The  total  at  the  begin- 
ning of  1899  was  $509,000,000.  Here  we  have  an 
expansion  of  $1,300,000,000  in  deposits  [demand 
obligations  of  the  banks  used  in  the  community  as 
funds],  while  the  basis  of  gold  and  legal-tenders 
upon  which  that  inverted  pyramid  stands  is  actually 
slightly  smaller  than  it  was  at  the  beginning  of  the 
period.  Now,  in  that  same  time,  the  deposits  of 
the  other  banks  —  State  banks,  trust  companies, 
savings  banks,  and  private  banks  —  have  probably 
increased  not  far  from  three  billion  dollars,  and 
there  is  little  likelihood  that  their  gold  and  legal- 
tender  reserve  is  materially  larger  than  —  if  it  is  as 
large  as  —  at  the  beginning  of  1899.  We  have  had, 
then,  in  less  than  four  years,  an  increase  in  the  bank 
deposits  [bank  credit-accounts]  of  the  country  of 
over  four  billion  dollars  accompanied  by  no  increase 
in  the  specie  or  legal-tender  holdings  of  these  banks." 

Causes  of  Credit  Contraction 

The  data  relied  on  for  this  conclusion  were  taken 
from  the  report  of  the  Comptroller,  an  official 
compilation  made  from  the  returns  of  the  banks 
themselves.  The  evidence  presented  in  the  report 
of  the  Comptroller,  however,  went  further ;  it  showed 


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BANKING  AND   SPECULATION  5 

that,  during  the  period  under  discussion  by  Mr. 

VanderHp,  the  capital  of  these  institutions  had  not 

been  proportionately  increased.     We  may  take  a  still 

longer  period:  May,  4,  1893  (before  the  depression 

began),  the  capital,  surplus,  and  undivided  profits  of 

National  banks  amounted  to  $1,041,- 
Lack  of  capital      o         /-/^  o        r'      ^^       i_ 
support  807,066.87;  September   15,   1902,   at 

the  time  of  the  last  report  before  the 
more  recent  tenseness  of  the  financial  situation  began 
to  be  felt,  the  total  of  capital,  surplus,  and  undivided 
profits  was  only  $1,201,145,882.69,  a  decrease  of 
nearly  $11,000  per  bank  doing  business.  There  had 
been  an  increase  of  $1,561,335,896.44  in  obligations 
to  depositors,  while  the  gross  increase  in  capitaliza- 
tion available  to  support  this  increase  in  demand 
liabilities  was  only  $159,338,815.82,  about  ten  per 
cent.  The  average  net  increase  in  deposit  liabilities 
was  $282,418;  the  net  decrease  of  capital  was  $10,951 
per  bank  doing  business. 

The  banking  equipment  of  1893  had  proved  too 
weak  to  support  outstanding  credit  obligations.  In 
September,  1902,  the  current  credit-accounts  out- 
standing were  vastly  larger  than  in  1893.  Without, 
therefore,  materially  increasing  the  capital  employed 

in  the  business,  in  fact  actually  de- 
Comparison  of  .         .  .,    ,  ,       , 

iSq-zand  1002      creasmg  the  average  capital  per  bank 

doing  business,  the  banks  had  been 

offering  to  the  public,  and  actually  selling,  an  increase 

in  accounts-payable  over  those  outstanding  in  1893 


6  THE   BANK  AND   THE   TREASURY 

amounting  to  $1,567,000,000;  in  1902  they  had 
sold  an  amount  of  demand-credit  for  use  in  the  busi- 
ness community  as  funds  equal  to  about  double  the 
amount  of  deposit  liabilities  outstanding  in  1893. 
The  experience  of  1902  was  a  repetition  of  the  ex- 
perience of  1893,  and  this  in  turn  was  a  repetition  of 
1884  and  1873.  In  each  of  the  previous  cases  disas- 
ter had  followed  close  on  the  heels  of  an  inflation  of 
credit-accounts. 

Methods  Employed  jor  Expanding  Commercial 
Credit 

But  in  his  address  of  warning  Mr.  Vanderlip  did 
not  stop  with  showing  the  weakness  of  the  reserve 
basis.  He  proceeded  to  a  second  conclusion: 
"What,"  he  asks,  "has  brought  about  this  remark- 
able development  of  bank-credit?"  The  answer 
must  at  once  come  to  the  mind  of  any  observer  of 
finance  that  the  principal  reason  for  the  expansion 

of  deposits  (bank  credit-accounts) 
The  flotation  0/  ,    , ,  .  .  r 

new  companies     ^nd  the  accompanymg  expansion  of 

loans  (commercial  paper  held  by 
banks)  is  to  be  found  in  the  great  movement  which 
has  been  the  significant  feature  in  financial  affairs  of 
the  last  half  dozen  years  —  the  movement  to  aggre- 
gate industrial  establishments  into  single  great  cor- 
porate units  and  to  convert  the  evidence  of  ownership 
into  corporate  securities  which  have  entered  actively 
into  the  stream  of  financial  operations.   Vast  amounts 


BANKING  AND  SPECULATION  7 

of  new  securities  have  been  created  in  these  half- 
dozen  years,  based  in  a  large  measure  upon  proper- 
ties which  were  before  held  as  fixed  investments  by 
individuals,  or,  if  standing  in  the  form  of  corporate 
property,  the  securities  of  these  corporations  were 
more  closely  held,  and  in  but  small  measure  entered 
into  the  financial  operations  of  the  day.  This  move-^ 
The  use  of  new  ment  —  tending  to  convert  the  evi-' 
issues  as  col-  dences  of  ownership  of  a  great  amount 
^  ^^^  ^  of  fixed  property  into  a  form  which 

has  been  considered  a  bank  collateral,  and  which  has 
been  made  the  basis  of  loans  and  of  corresponding 
increases  or  deposits  —  is  undoubtedly  the  most  im- 
portant single  cause  for  the  increase  of  more  than 
four  billion  dollars  in  bank  deposits  [bank  accounts] 
and  bank  loans  [commercial  paper]  of  the  country 
in  the  space  of  three  or  four  years. 

A  False  Notion  oj  ^^ National  Prosperity''^ 

We  would  not  shut  our  eyes  to  industrial  progress 
—  to  the  fact  of  augmented  capital  and  increasing 
production.  We  would  not  deny  the  benefit  of 
thrift,  nor  the  prosperity  which  comes  from  mating 
industry  with  economy.  But  such  are  not  the  phe- 
nomena which  have  stirred  national  pride,  carried 
The  imaginative  it  beyond  the  rule  of  reason,  and  un- 
quality  in  busi-  settled  the  judgment  of  our  industrial 
leaders.  Periodically  we  become  psy- 
chologically drunk.     That  which  has  inebriated  has 


8  THE  BANK  AND  THE  TREASURY 

not  been  the  wine  at  the  feast,  but  a  distorted  imagi- 
nation that  lives  in  dream-pictures  of  opulence.  Not 
the  actual  increase  in  wealth,  but  an  increase  in  the 
estimates  of  value  given  to  our  possessions  swells  us 
with  a  vanity  of  hope  which  marks  us  for  destruction. 

The  basis  for  criticism  for  every  "note  of  caution" 
addressed  to  the  public  during  such  a  crucial  period 
is  found  in  the  exuberant  feeling  then  current,  ex- 
pressed in  the  oft-repeated  phrase  "national  pros- 
perity." If  we  accept  the  reasoning  of  Mr.  Vander- 
lip  and  others,  the  ancestral  lineage  of  this  wonderful 
prosperity  is  not  hard  to  trace.  At- 
i8q^-i8q6^^  '  tention  may  be  called  to  the  fact  that 
the  depression  from  1893  to  1896  was, 
as  were  other  similar  periods,  one  of  financial  reor- 
ganization —  one  of  new  economies  introduced  into 
our  industrial  establishment.  During  this  period  of 
depression  the  water  had  been  gradually  squeezed 
out  of  previously  inflated  capitalizations;  again  the 
nation  had  come  to  rely,  for  its  "cash"  as  well  as  for 
its  income,  on  profits  from  legitimate  business.  With 
such  an  equipment  we  were  able  to  sell  pig  iron  at  a 
profit  of  $10  to  $12  per  ton;  steel  rails  were  sold  with 
a  liberal  return  to  capital  at  $17.50  per  ton;  and  bar 
iron  entered  a  profitable  market  at  95  cents  per 
hundred. 

After  business  had  been  reorganized  on  a  lower 
base  of  capital  liabilities,  thousands  of  commodities 
were  produced  with  profit  at  prices  such  that  they 


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BANKING  AND   SPECULATION  9 

began  to  find  their  way  into  foreign  marts  and,  in 
competition  with  foreign  made  goods,  undersold 
them.  Europe  was  startled  at  our  commercial 
strength  developed.     Our  appearance  with  shiploads 

of  products  that  others  could  not 
vival  of  1807        manufacture     at     competitive    rates 

made  the  world  realize  that  in  the 
Western  continent  were  resources  and  an  industrial 
development  that  in  free  competition  might  bid  de- 
fiance to  all  Europe.  Under  such  circumstances  bills 
of  exchange  drawn  against  the  sale  of  these  goods 
formed  a  true  basis  for  commercial  bank  loans,  and 
bank-credits  were  supported  by  capital-resources  ade- 
quate to  protect  them  —  a  banking  equipment  that 
included  a  thirty-three  per  cent  money-reserve  for 
the  redemption  of  demand  obligations.  And  as  our 
foreign  trade  increased,  instead  of  allowing  this 
banking  equipment  to  become  impaired,  we  at  that 
time  imported  gold  for  new  banking  reserves,  to 
support  new  credits,  and  new  current  funds  were 
again  at  hand  for  the  support  of  still  larger  commer- 
cial accommodations  in  the  purchase  of  bills  and 
commercial  paper  based  on  actual  sales  of  produce. 
What  was  the  result,  however,  when  the  commer- 
cial bank  extended  its  support  to  the  capitalization  of 
new  promotions  and  became  the  chief  factor  in  the 
"industrial  speculation"  that  grew  out  of  this  sudden 
national  awakening?  Instead  of  limiting  the  com- 
mercial banking  business  to  the  service   of  a  com- 


10       THE  BANK  AND  THE  TREASURY 

mercial  constituency,  instead  of  devoting  the  energies 
and  the  funds  of  commercial  banks  to  the  accommo- 
So-called  pros-  dation  of  producers  and  merchants, 
perity  and  specu-  a  system  of  underwriting  new  fiota- 
lative  excesses      ^^^^^    ^^^   inaugurated.      This   was 

not  a  novel  experience.  Similar  practice  is  recalled 
by  the  ex-Assistant  Secretary  of  the  Treasury,  by 
reference  to  the  "real-estate"  restriction  in  the  Na- 
tional Bank  Act.  Back  of  the  law  forbidding  banks 
to  loan  on  real-estate  securities  may  be  seen  the  long 
periods  of  industrial  depression  and  financial  reor- 
ganization following  the  panics  of  1825,  1837,  and  1847. 
,  Each  period  of  prosperity  immediately  preceding 
/these  crises  had  been  one  of  capitalization  of  new 
'  promotions.  At  that  time,  however,  speculation  was 
based  on  the  possibilities  of  increasing  profits  to  be 
derived  from  the  development  of  agricultural  re- 
sources. Westward  migration  had  appropriated  for 
use  large  areas  —  a  new  empire—  of  grain  lands  for 

which    new    transportation    develop- 
False  attitude  of  ,    ^      ^  ^  ^     .    .       ,^ 

the  banks  ment  had  opened  a  market  to  the 

seaboard.    New  cotton,  tobacco,  and 

hemp  lands  enlarged  this  area  to  such  an  extent  that 

the  territory  appropriated  but  still  undeveloped  was 

larger  than  the  old  Atlantic  slope  to  which  capital 

had  before  confined  its  investments.     In  these  new 

areas  all  other  demands  gave  way  to  the  clamor  for 

new  capital,  and  the  commercial  banks  attempted 

to  supply  this  demand. 


BANKING   AND   SPECULATION  11 

The  failure  of  some  eight  or  nine  hundred  com- 
mercial banking  institutions  during  1837  and  1838 
was  the  result  of  this  kind  of  bank-credit  employ- 
ment; the  failure  of  nearly  fifteen  hundred  banks 
during  the  next  three  decades  of  State  banking  on 
investment  securities  brought  to  the  mind  of  prac- 
tical bankers  the  character  and  purpose  of  the  com- 
mercial bank.  In  1903  and  1904,  while  Europe 
was  going  through  the  throes  of  financial  reorgan- 
ization, our  farmers  were  blessed  with  large  crops 
and  high  prices;  a  kind  and  bountiful  Providence 
Need  jor  re-  filled  the  granaries  and  the  storehouses 
medial  legisla-  of  the  great  West  and  South,  per- 
^"^  mitting  us  to  levy  tribute  on  a  dis- 

tressed world.  Temporarily  judgment  on  our 
financial  folly  has  been  suspended,  but  the  instru- 
ments of  self-destruction  are  still  in  the  hands  of 
an  unthinking  public.  Organized  and  capitalized 
for  the  purpose  of  rendering  service  to  a  business 
community  in  furnishing  "current  funds,"  or  "cash" 
i  for  current  use,  the  equipment  of  the  commercial 
ibank  is  necessarily  ill-adapted  to  the  work  of  "per- 
jmanent  capitalization."  To  employ  the  funds  of  a 
commercial  bank  for  long-time  real-estate  investment 
has  ever  been  found  unsafe,  and  following  1837  legis- 
lation was  invoked  to  protect  the  public  against  loss. 
The  same  need  for  restrictive  and  protective  legisla- 
tion is  now  upon  us.  And  such  legislation  should 
be  as  welcome  to  the  conservative  banker  as  to  the 


12  THE  BANK  AND  THE  TREASURY 

community.  The  public  requires  protection  against 
ruinous  disturbances  to  commercial  credit;  the  con- 
servative banker  would  be  protected  against  the 
competition  of  short-sighted  speculators  who,  posing 
as  bankers,  are  responsible  for  these  disturbances. 


Chapter  II 

THE  USE  OF  COMMERCIAL  BANK-CREDIT  IN  LIEU  OF 
INDUSTRIAL  CAPITALIZATION 

In  business,  there  are  two  distinct  classes  of  obli- 
gations for  the  future  payment  of  money  which  are 
made  subjects  of  investment.  These  two  classes  are 
commonly  known  as  (i)  capital  liabilities,  and  (2) 
current  credit  liabilities,  or  floating  debt.  The  capi- 
tal liabilities  are  those  obligations  (shares  or  bonds) 
incurred  by  a  concern  which  are  sold  to  obtain  funds 
or  properties  for  permanent  equipment  or  for  con- 
tinuous use  in  the  business.  The  current  credit 
liabilities  are  those  obligations  which  are  sold  to 
obtain  funds  for  some  temporary  or  current  need. 

These  differing  purposes  give  char- 
Methods  of  capi-        .        .      .-,       .  ,  r  ,       , 

talization  acter  to  the  two  classes  of  contracts 

as  investments.  The  need  for  capital 
being  a  continuing  one,  the  contracts  representing 
capital  liabilities  are  long-time  contracts.  Share 
contracts  are  those  on  which  the  invested  principal 
is  not  due  or  payable  during  the  life  of  the  concern 
without  a  proprietary  resolution  reducing  the  amount 
of  capital  employed.  Even  the  current  income  pay- 
ments on  share  contracts  are  made  contingent  on 

[13] 


14        THE  BANK  AND  THE  TREASURY 

profits  and  the  declaration  of  dividends;  there  is  no 
obligation  for  payment  of  money  which  will  in  any 
way  embarrass  the  concern  or  threaten  its  capital. 
The  "credit"  capital  liabilities  are  those  contracts 
for  the  future  delivery  of  money,  such  as  bonds  and 
mortgages,  the  principal  of  which  is  made  payable 
after  such  a  time  that  the  company  may  make  ample 
provision  by  payment  out  of  profits  or  by  occasional 
refunding.  A  company  which  has  not  been  ade- 
quately capitalized  may,  however,  procure  equip- 
ment and  properties  for  continuous  use  with  funds 
obtained  by  temporary  loans  or  on  floating  debt. 
This  bespeaks  a  condition  of  under  capitalization, 
is  unusual,  and  is  dangerous  to  the  last  degree. 

The  capitalization  of  a  business  by  means  of  long- 
time obligations  should  be  large  enough  to  cover  all 
of  the  continuous  financial  needs.  That  is,  the  cap- 
ital thus  contributed  must  be  large  enough  to  provide 
the  properties  and  equipment  permanently  or  con- 
tinuously used.  To  provide,  by  the  sale  of  long-time 
obligations,  more  funds  than  are  needed  to  carry  the 
stock  and  to  obtain  the  property  and  equipment 
continuously  needed,  would  be  to  encumber  the  busi- 
ness with  an  unnecessary  capital  burden.  To  pro- 
vide, by  sale  of  long-time  contracts. 
Capital  require-    r      j     i         •  i.    ^u        i.u 

^gj^^       ^  funds  less  m  amount  than  the  per- 

manent or  continuous  needs,  would 
be  to  handicap  the  management  by  putting  it  under 
the  necessity  of  constantly  refunding  capital  needs 


BANK-CREDIT  IN  LIEU   OF  CAPITALIZATION       15 

and  to  prejudice  success  by  carrying  a  floating  debt, 
at  an  increased  current  cost,  for  the  payment  of 
which  there  are  no  assets  available  other  than  those 
which,  if  taken  for  liquidation,  would  impair  the 
equipment  in  use. 

The  distinction  between  capital  liabilities  and  cur- 
rent liabilities  for  the  present  purpose  is  this,  that  the 
former  should  be,  and  usually  are,  the  subject  of 
direct  capital  investment,  while  the  second  usually 
are  the  subject  of  commercial  bank-credit  invest- 
ment. The  commercial  bank  is  not  organized  for 
Capitalization  0}  direct  capital  investment.  It  is  cap- 
permanent  finan-  italized  for  the  purpose  of  supporting 
wee  5  j^g  ^^^  credit  obligations ;  and  these 

credit  obligations  in  turn  are  used  as  a  means  of 
purchasing  the  current  liabilities  of  other  business 
concerns.  This  is  the  business  of  banking.  One  wish- 
ing capital-funds  ordinarily  must  apply  to  some  one 
having  funds  for  long-time  investment.  Capitaliza- 
tion depends  on  the  long-time  investment  powers  of 
a  community.  The  permanent  equipment  of  com- 
merce and  industry  can  safely  increase  only  so  fast 
as  investment  capital  increases.  Investment  capital 
is  increased  by  importation  as  a  result  of  foreign 
investment,  or  by  net  income  in  the  form  of  returns 
on  prior  investments.  The  demand-credits  (or  de- 
posits) of  banks  are  neither  of  these,  and  therefore 
are  not  proper  funds  for  use  in  purchasing  permanent 
equipment. 


16       THE  BANK  AND  THE  TREASURY 

In  the  recent  period  of  inflation,  as  in  other  periods 
of  speculation,  it  was  not  found  necessary  to  await 
the  tardy  development  of  capital-funds  for  purchases 
of  this  kind;  promoters  did  not  find  it  necessary  to 
appeal  to  such  an  investing  constituency.  They 
Funding  pernia-  found  that  by  incorporating  industrial 
nent  needs  by  means  enterprises  and  consolidating  corpo- 
oj  bank-credit  ^^^^  control  into  still  larger  corporate 
syndicates,  these  new  securities  or  "industrials"  so 
created  could  be  listed  on  the  market  and  could  be 
made  the  subject  of  general  quotation.  This  step 
taken,  the  speculation  induced  by  the  sudden  realiza- 
tion of  our  commercial  greatness  as  a  world  power 
was  converted  into  an  agency  for  marketing  the  new 
securities  to  banks.  An  active  buying  having  been 
"stimulated,"  it  was  not  necessary  to  wait  for  the 
investing  public  to  absorb  the  flotation ;  the  margin 
speculator  was  utilized  to  obtain  capital-funds  from 
our  commercial  credit  institutions,  using  the  securi- 
ties so  created  as  "collaterals."  One  syndicated 
issue  having  been  introduced  into  the  speculative 
pool  and  floated  on  margins  (the  promoters  having 
realized)  a  new  consolidation  was  undertaken  and 
in  like  manner  funds  were  again  procured  from  the 
commercial  banks.  The  infection  spread  from  in- 
dustrials to  railroads,  to  mines,  and  to  every  form  of 
undertaking. 

It  was  on  this  character  of  banking  resources  — 
loans,  secured  by  newly  created  collaterals  —  that 


BANK-CREDIT  IN  LIEU  OF  CAPITALIZATION       17 

a  large  part  of  the  increase  in  our  credit-funds  (the 
deposits  of  commercial  banks)  was  based.  It  is  to 
credit  obligations  of  this  kind — those  used  by  banks 
as  a  means  of  purchasing  collateral  notes  of  brokers 
and  promoters  secured  by  new  flotations  -r  that 
many  of  the  disturbances  to  commercial  credit  are 
The  character  of  attributable.  Investments  of  bank- 
bank-credii  so  credit  are  not  capital  investments. 
crea  ed  g^  ^^  ^^^  them  is,   by  sudden  credit 

expansion  and  then  by  a  subsequent  credit  con- 
traction, to  threaten  industry  with  loss  of  equipment, 
or,  by  inability  to  contract,  to  threaten  the  bank  with 
insolvency.  Before  such  insolvency  will  be  admitted, 
however,  the  increased  credit  burden  will  be  shifted 
on  the  commercial  constituency  of  the  bank.  The 
bank  —  the  provider  of  current  funds  for  current 
use  —  is  forced  to  sacrifice  the  ends  of  its  creation ; 
being  allured  into  this  kind  of  investment  by  a  pros- 
pect of  large  gains  from  speculation,  it  is  converted 
into  an  instrument  of  business  uncertainty  and  of 
wholesale  financial  debauchery. 

Expansion  oj  Bank-Credit  and  False  Estimates  of 
Future  Earning  Power 

That  a  temporary  increase  in  industrial  activity 
results  from  these  practices  cannot  be  denied.  Such 
has  ever  been  the  result  of  speculative  promotions 
and  credit  inflations.  The  cause  of  this  increased 
activity,  however,  is  quite  apparent.     In  each  so- 


18        THE  BANK  AND  THE  TREASURY 

called  "period  of  prosperity"  the  immense  amount 
of  new  funds  made  available  for  the 

CTsdit  ^ftildtiofi 

and  rising  prices  purchasc  of  properties  and  equipment 

through  the  flotation  of  securities  and 
the  expansion  of  bank-credit  has  increased  the  de- 
mand for  every  kind  of  material  —  of  construction, 
of  maintenance,  and  of  subsistence.  From  1898  to 
1903  manufacturers  of  pig  iron  could  not  fill  do- 
mestic orders,  and  prices  advanced  from  "$12  per 
ton  in  Octoberj_i8^8,  to  $25  at  the  beginning  of  1000 ; 
steel  rails  doubled  in  the  same  period,  the  price  gomg 
from  $17.50  to  $35;  bar  iron  scored  even  a  greater 
percentage  of  gain  within  a  shorter  time,  the  price 
advancing  from  95  cents  a  hundred  in  July,  1897,  to 
$2.60  in  October,  1899.  The  quotations  of  clear  pine 
boards  advanced  from  $45  to  $73  a  thousand;  for 
brick,  from $4. 50  to  $6;  rope,  from  5I  cents  to  13  cents, 
and  salt,  from  21  cents  to  $1."  Prices  were  advanced 
all  along  the  line,  in  cases  doubled  and  quadrupled. 
An  increase  from  four  to  six  billions  in  the  credit- 
funds  within  five  years  —  billions,  not  millions  — 
made  available  to  the  country  as  a  means  of  pur- 
chasing new  materials  and  new  services,  by  a  simple 
process  of  "flotation,"  operated  to  put  the  conduct 

of  enterprise  into  the  hands  of  pro- 
False  estimates  oj         .  1       i  i.    j    ivi.i      tu        u*. 

valuation  "^^ters  who  have  had  little  thought 

for  the  future.     Of  what  interest  was 

it  to  the  promoter  that  he  was  offering  prices  for 

materials  twice  or  three  times  their  cost  when  the  funds 


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BANK-CREDIT  IN  LIEU  OF  CAPITALIZATION       19 

with  which  to  pay  for  them  were  so  easily  obtained  ? 
Why  should  he  be  concerned  with  cost  of  production 
when  his  profits  were  to  come  from  promotion  and 
equipment  instead  of  coming  from  operations  or 
permanent  income  on  investment  ?  Of  what  interest 
is  it  to  merchants  and  manufacturers  that  prices  are 
higher  when  they  might  sell  at  advances  which  would 
yield  increased  net  profits?  These  new  trade  de- 
mands and  the  consequent  higher  prices  of  products, 
based  on  credit-funds  obtained  from  speculative  flo- 
tations, temporarily  increased  the  profits  of  produc- 
tive enterprise,  and  these  new  margins  of  profit 
carried  speculation  in  capital  shares  to  a  still  higher 
mark;  again  new  market  quotations  made  a  new 
basis  for  estimates  of  value  of  the  securities  offered 
as  collaterals;  these  in  turn  increased  the  amount  of 
bank-credit  made  available  for  higher  spendthrift 
prices;  and  again  there  came  larger  returns  in  the 
form  of  immediate  net  earnings  to  plants  set  in 
motion  at  a  higher  speed  with  larger  equipment  for 
supplying  customers'  demands.  As  has  been  re- 
peatedly demonstrated,  this  is  not  prosperity,  but 
the  result  of  a  debauched  popular  judgment  recording 
new  increments  of  wealth  by  a  process  of  increasing 
valuation  of  goods. 

No  other  explanation  is  needed  for  the  reverse  of 
the  foreign  trade  balance.  When  American  prices  are 
high,  instead  of  having  a  trade  balance  to  be  settled 
in  Europe,  exportation  becomes  so  far  reduced  and 


20       THE  BANK  AND  THE  TREASURY 

importation  so  far  increased  that  for  months  at  a^ 
time  we  are  forced  to  borrow  from  abroad  on  "finance 
bills"  —  or  other  devices  —  some  form  of  floating 
debt  incurred  by  our  bankers  as  a  means  of  meeting 
the  demands  of  a  commercial  con- 
joreign  trade  stituency.  After  1898,  instead  of  im- 
porting gold,  "there  has,  in  spite  of 
the  theoretical  trade  balance,  been  no  significant 
shipment  of  gold  in  our  direction,"  except  when 
forced  by  temporary  loans.  More  than  this,  our 
financial  institutions  have  not  had  the  strength  to 
keep  gold  on  this  side.  Before  the  end  of  1902  we 
had  begun  to  lose  our  gold.  At  that  time  conserva- 
tive bankers  pertinently  asked:  "What  of  the  fu- 
ture?" "If  a  hundred  million  dollars'  importation 
of  gold  can  serve  as  a  basis  for  an  expansion  of  so 
many  millions  of  dollars  of  deposits  and  loans,  what 
will  an  exportation  of  $100,000,000  mean?"  It 
might  have  been  added,  that  in  all  probability  the 
adverse  balances  against  our  financial  centres  would 
have  resulted  in  a  complete  overthrow  of  our  inflated 
credit  system  had  not  the  United  States  Treasury 
come  to  the  relief  of  commercial  banking  institutions 
with  deposits  (loans  of  the  Government  to  the  banks) 
amounting  to  over  $100,000,000;  and  within  four 
months  Government  aid  to  the  banks  was  increased 
to  more  than  $160,000,000. 


BANK-CREDIT   IN   LIEU   OF   CAPITALIZATION       21 

Banking  Crises  Due  to  Credit  Inflation 

But  even  with  the  support  given  by  the  Treasury, 

as  events  subsequently  proved,  the  credit  problem 

was  not  solved.     The  question  of  the  ability  of  the 

commercial  banks  of  the  country  to 
The  crisis  of  ,,     .  ...  ., 

2  serve  their  constituency  with  current 

funds  (the  problem  of  adjusting  the 
speculative  situation  and  forcing  liquidation  of  spec- 
ulative loans  to  such  an  extent  as  not  to  compel  them 
to  restrict  accommodations  to  commercial  enter- 
prise) kept  the  New  York  banker  in  a  quandary  by 
day  and,  for  two  years,  hung  over  him  like  a  spectre 
by  night. 

With  all  effort  bent  toward  the  common  cause; 
with  united  action  on  the  part  of  the  commercial 
banking  fraternity  acting  on  the  best  counsel  and 
combining  their  united  resources  with  those  fur- 
Tke  cooperation  nished  to  the  banks  by  the  Treasury, 
of  banks  for  pro-  they  managed  to  maintain  their  finan- 
^^  ^^^^  cial  integrity,  although  this  was  ac- 

companied by  a  long  line  of  forced  liquidations.  To 
a  large  extent  the  "capitalization"  of  these  new  pro- 
motions fell  on  the  banks  and  trust  companies  and 
weakened  their  equipment  for  the  support  of  com- 
mercial credit  accommodations. 

During  the  first  weeks  of  January,  1903,  with  the 
customary  New  Year's  commercial  settlements  and 
payments,  there  was  a  relaxation  of  nervous  tension 


22        THE  BANK  AND  THE  TREASURY 

induced  by  what  had  come  to  be  speculative  neces- 
sity. But  the  far-seeing  read  the  handwriting  on  the 
wall.     Summer  demands  must  be  provided  for;  the 

'^ finance  bills"  were  coming  due  and 

Forced  liquida-      ,,  i.-t.i.ji.  j 

i^g^        ^  these  contributed  to  an  adverse  mter- 

national  balance  which  set  up  expor- 
tation of  gold;  the  character  of  securities  held  by 
American  banking  houses  was  not  attractive  to  for- 
eign investors  and  sales  of  these  could  not  be  utilized 
as  a  set-off  against  foreign  balances ;  moreover,  spec- 
ulative syndicates  found  it  necessary  to  ''buy  in" 
securities  offered  on  the  other  side  below  the  market 
here. 

It  is  much  to  the  credit  of  our  leading  banking 
institutions  that  in  1902  a  campaign  of  liquidation 
was  inaugurated  in  time  to  allow  them  gradually  to 
"convert"  speculative  loans,  in  anticipation  of  de- 
mands —  to  make  available  those  forms  of  holdings 
Circumstances  which  in  time  of  financial  strain  are 
javoring  the  absolutely  Unavailable,  but  which  may 
'^^  ^  be  realized   on  without  loss  to  the 

banks  if  pressure  is  brought  on  the  borrower  in  such 
moderation  as  not  to  induce  panic.  By  making  this 
pressure  a  gradual  one,  all  the  resources  of  the  spec- 
ulative public  in  the  market  were  utilized. 

But  the  effect  was  deadly.  First  the  margins  and 
accounts  of  the  small  speculators  were  wiped  out; 
then  the  more  resourceful  "outsider"  was  driven  to 
the  limit  of  his  means  and  was  forced  to  suspend 


BANK-CREDIT  IN  LIEU  OF  CAPITALIZATION       23 

operations;  later  the  contest  was  carried  on  between 
"insiders"  and  "professionals,"  the  stronger  utiliz- 
ing profits  gained  from  those  less  able  to  manipulate 
the  market ;  but  in  the  end  all  contributed  (through 

demands  to  maintain  margins  on  a 
tton  ^       falling  market  by  sale  of  stock  and  by 

reduction  of  loans)  to  keep  up  the 
reserves  of  the  banks  and  protect  the  credit  of  New 
York  institutions  against  exportation  demands  and 
against  "calls"  on  reserve  loans  from  the  interior. 
For  two  years  this  liquidation  continued.  Those 
banks  which  had  confined  their  operations  to  a  com- 
mercial banking  business  were  able  to  protect  them- 
selves and  their  customers  against  serious  losses.  By 
fortuitous  circumstances,  by  aid  of  the  Government, 
and  by  cooperative  action,  through  their  ability  to 
utilize  the  profits  and  resources  massed  by  specula- 
tors during  the  five  years  preceding,  those  into  whose 
.fostering  care  the  national  funding  system  has  been 
given  were  not  driven  to  measures  which  seriously 
interfered  with  commerce.  These  resources,  how- 
ever, are  incidental,  and  speculative  profits  are  not 
limitless;  in  fact  a  number  of  the  large  operators  so 
far  felt  the  results  of  parallel  reductions  in  prices  and 
of  the  confiscation  of  margins  that  they  can  be  of  no 
further  utility  to  the  banks.  It  was  the  bounteous 
return  of  a  wide  expanse  of  fertile  soil  and  a  partial 
failure  of  supplies  abroad  with  corresponding  profit- 
able returns  to  the  farmer  of  the  South  and  the 


24        THE  BANK  AND  THE  TREASURY 

West  that  saved  the  day  for  American  financial  in- 
stitutions in  1904. 

Falling  Prices  and  Industrial  Depression 

That  the  financial  situation  is  still  a  dangerous  one 

is  apparent.     And  the  danger  lies  not  so  much  in  a 

present  or  in  an  approaching  crisis  as  in  the  continued 

use  of  a  dangerous  instrument  of  commerce.     This 

danger  is  always  present  and  will  be  so  long  as 

present  practices  continue.     The  recurring  necessity 

for  adjustments  of  credit  to  a  lower 
The  scalinc  oj       ■,       ■,    ■,         ,  . ,         i  •  r  r 

valuations  l^^^l  has   been   the   chief   source  of 

financial  disturbances  in  the  past. 
This  has  been  brought  about  by  the  repetition  of 
speculative  expansion  and  subsequent  forced  credit 
liquidation.  Forced  credit  liquidations  have  re- 
sulted in  declining  valuation  of  assets  and  a  lessening 
ability  to  meet  credit  obligations  outstanding.  "^~-~ 
,  The  basis  of  credit  judgment  is  estimated  ability 
to  pay.  This  estimate  is  arrived  at  by  the  use  of  that 
financial  device  known  as  a  "balance-sheet,"  on  one 
side  of  which  are  placed  "liabilities"  and  on  the 
other  "estimated  valuation  of  assets."  The  liabili- 
ties of  a  business  concern  are  the  "weights"  used  in 
adjusting  the  balances;  they  are  fixed  in  amount. 
In  arriving  at  financial  condition, 
jiidgtnenr^  ^^  "liabilities"  are  placed  on  the  right- 
hand  side  of  the  scales.  Then  on  the 
other  side  of  the  accounting  balance  is  placed  "ap- 


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BANK-CREDIT  IN   LIEU   OF   CAPITALIZATION       25 

praisement"  or  "the  valuation  of  assets."  If  the 
amount  of  the  "valuation"  exceeds  the  amount  of  the 
''liabilities,"  then  there  is  recorded  a  "surplus."  If 
the  scales  swing  in  the  other  direction  there  is  re- 
corded a  "deficit."  This  "surplus"  (or  "deficit") 
of  value  of  assets  over  liabilities  is  the  basis  for  judg- 
ment as  to  the  value  of  securities  and  as  to  ultimate 
ability  to  liquidate  credit.  The  basis  for  judgment 
of  short-time  demand-credit,  however,  is  estimated 
value  of  "available"  or  readily  "convertible  assets;" 
these  are  weighed  against  "current  liabilities." 

The  depreciation  or  reduction  in  estimates  of  value 
placed  on  "industrials"  alone  during  the  first  year 
after  September,  1902,  has  been  calculated  to  exceed 
three  thousand  million  dollars.  If  other  securities 
are  included,  the  most  conservative  estimate  of  the 
amount  of  depreciation  is  beyond  comprehension, 
unless  we  reduce  the  estimated  value  of  assets  to  a 
Contraction  of  mathematical  comparison  with  fixed 
credit- funds  to  level  liabilities.  With  this  continuous  scal- 
oj  capital  support  j^^  ^^  estimates  of  "value  of  assets," 
some  business  concerns  have  not  been  able  to  make 
the  necessary  adjustment.  Seven  of  the  so-called 
"trusts"  have  become  insolvent,  and  ten  or  twelve 
others  have  admitted  the  speculative  character  of 
judgments  on  which  their  "prospectus"  profits  and 
prospective  dividends  were  based  by  passing  divi- 
dends. And,  as  in  former  periods  of  readjustments, 
depreciation  {i.e.,  the  scaling  of  estimates  of  value) 


\ 


26  THE  BANK  AND   THE  TREASURY 

of  securities  must  continue  until  the  earning  capacity 
of  the  joint  stock  institutions  has  been  demonstrated 
to  be  adequate  to  justify  investment  at  a  level  of 
valuation  which  may  be  maintained. 

The  greatest  public  danger  to  be  feared  from  this 
sort  of  credit  expansion  and  contraction  is  that  spec- 
ulative gains  may  not  be  adequate  or  available  to 
meet  demands  for  credit  liquidation  when  readjust- 
ment of  the  credit  load  becomes  necessary.  When 
the  financial  balance  cannot  longer  be  kept  in  ad- 
justment by  exchange  of  ''securities"  owned  against 
liabilities  (i.e.,  by  process  of  cancellation  of  liabilities 
of  one  concern  against  the  liabilities  of  another),  and 

the  weight  of  liquidation  falls  on  pro- 
The  dancer  io  be    ,      .        r    •    j     i.         •         ^i  i 

feared  ducts   of   mdustry,   m   other   words, 

when  liquidation   is  forced  into  the 
market  where  ''goods"  are  disposed  of,  then  it  may 
become  necessary  to  readjust  the  whole  industrial 
machinery  to  such  a  level  of  capitalization  that  net 
profits  may  give  ample  return  on  the  capital  liabilities 
represented  in  the  balance-sheet.     If  this  readjust- 
ment falls  on  a  period  of  low  productive  returns  (poor 
)  crops  and  low  prices),  asjni8Qj-^6,  then  the  reaction 
I  and  reorganization  becomes  far-reaching.     A  period 
/  of  financial  readjustments  is  what  we  know  as  an  era 
of  commercial  and   industrial  depression.     It  was 
such  a  condition  that  we  had  to  face  in  1893,  after  the 
speculative  collapse  of  December,  1890,  and  the  re- 
organization continued  until  1897.     Similar  to  this 


BANK-CREDIT  IN   LIEU   OF   CAPITALIZATION       27 

was  the  period  of  readjustment  from  1884  to  1886, 
after  the  excesses  of  1879  to  1883;  and  still  further 
back  may  be  found  the  long  depression  of  1873  to 
1878,  after  the  speculative  activities  following  the 
close  of  the  War.  And  although  every  favoring  cir- 
cumstance has  been  with  us  to  support  the  inflated 
capitalization  of  the  speculation  price  of  1902,  we 
cannot  say  that  we  are  yet  on  a  safe  and  sure  financial 
foundation. 

Demands  jor  Greater  Elasticity 

It  is  during  such  periods  of  credit  contraction,  and 
industrial  depression  that  demands  for  "elasticity" 
may  be  found  written  on  the  editorial  pages  of  news- 
papers and  financial  periodicals.  At  such  time, 
"elasticity"  is  the  term  most  often  heard  in  pul^lic 

councils  and  in  private  financial  dis- 
elasticity  cussion.     Though  frequently  used  it 

is  a  term  accepted  without  definition, 
and  understood  by  each  to  mean  something  that  will 
afford  him  financial  relief.  Each  person  puts  into 
the  word  a  different  content:  to  the  man  in  commer- 
cial pursuit  "elasticity"  means  ability  to  obtain  funds 
for  current  use  in  the  form  of  bank  accommodation ; 
to  the  banker  it  signifies  ability  to  expand  and  con- 
tract his  supply  of  money  according  to  his  own  needs 
for  payment;  others  take  it  to  mean  the  ability  of 
the  Government  to  increase  or  decrease  the  general 
circulation.     It  is  this  failure  to  agree  on  the  meaning 


28        THE  BANK  AND  THE  TREASURY 

of  the  first  premise  of  their  reasoning    that  makes 
agreement  on  a  conclusion  so  difficult  to  reach. 

A  proper  understanding  of  the  problem  of  elasticity 
must  take  into  account  both  forms  of  current  funds, 
viz.:  bank  credit-accounts  (the  form  of  funds  used 
by  the  business  man),  and  money  (the  form  of  current 
funds  necessary  to  the  payment  of  balances  by  the 
banker).  To  the  individual  business  man  or  to  the 
individual  banker,  the  problem  resolves  itself  into 
one  of  the  relation  of  "available  assets"  (i.e.,  assets 
What  is  neces-  readily  convertible  into  cash)  to  "cur- 
sory/o  a  j^ro/»er  rent  liabilities,"  current  demands  for 
consideration  payment  of  cash.  The  exercise  of 
sound  discretion,  with  reference  to  proposed  meas- 
ures of  reform  looking  toward  elasticity,  however, 
requires  that  we  know,  not  only  the  character  of  the 
demand,  but  also  the  financial  machinery  with  which 
we  are  at  present  working  and  in  which  the  readjust- 
ment is  to  be  made. 


Chapter  III  ,^^__ 

THE  AMERICAN   SYSTEM  OF  CURRENCY  AND 
BANKING 

For  years  the  National  Bank  Act  has  been  a  sub- 
ject of  general  condemnation.  The  system  of  com- 
mercial banking  operating  under  it  has  been  pointed 
to  as  a  patchwork  —  as  an  impotent  device  that  has 
outgrown  its  original  usefulness;  it  has  been  referred 
to  as  a  financial  crutch  that  from  force  of  habit 
the  country  has  been  leaning  on  after  convalescence. 
These  critics  have  observed  that  our  system  differs 

from  banking  systems  of  Europe  and, 
Critics  of  the         -I  ,  ,  v  i      •        •  u  j 

System  ^^  analogy,  the  conclusion  is  reached 

that  our  financial  calamities  are  due 
to  these  differences.  The  champions  of  the  National 
banking  system,  however,  contend  that  in  the  same 
sense  every  institution  is  a  "patchwork";  that  the 
Bank  of  England  is  founded  on  and  constructed  of 
"patches"  of  legislation  and  administration,  having 
grown  out  of  the  exigencies  of  war  quite  as  truly  as  our 
own;  that  the  Bank  of  France  has  been  "patched" 
till  little  or  none  of  the  original  fabric  is  left ;  that  the 
Bank  of  Russia,  and,  in  fact,  if  cause  for  criticism 
be  found  in  this,  the  financial  systems  of  all  coun- 
tries are  to  be  brought  under  the  same  condemnation. 

[21)] 


30       THE  BANK  AND  THE  TREASURY 

What  the  critics  of  the  system  have  failed  to  see, 
and  that  which  is  most  important,  is  that  each  of  the 
great  financial  systems  has  been  evolved  from  con- 
ditions quite  different  from  our  own;  that  it  is  from 
these  differences  of  environment  (if  a  biological  figure 
may  be  used)  that  variety  has  been  produced  in 
financial  concerns  as  well  as  in  other  forms  of  busi- 
ness life.  Arising  out  of  conditions  peculiar  to  our- 
An  evolution  selves  we  have  a  distinctly  American 
from  American  institution  —  an  institution  that  has 
con  lions  ht^n  gradually  adjusted  to  our  busi- 

ness needs.  We  have  a  banking  system  as  distinctly 
our  own  as  is  our  factory  system,  our  railroad  system, 
our  school  system,  our  Government.  In  so  far  as 
there  is  demand  for  change,  it  is  in  the  nature  of  a 
further  development  of  the  institution  —  a  further 
adaptation  to  meet  the  growing  needs  of  a  fast  de- 
veloping and  rapidly  shifting  business  organization. 
With  this  statement  of  differing  point  of  view  in 
mind,  it  may  be  well  to  trace  the  distinctive  fea- 
tures of  the  American  system,  then  from  the  van- 
tage ground  of  the  institution  and  its  environment 
again  to  take  up  the  thread  of  discussion  as  to  the 
new  adaptations  proposed  or  that  may  be  thought 
necessary. 

The  Development  of  American  Banking  Ideals 

At  the  time  that  the  American  colonies  became 
embroiled  in  revolution  with  the  mother  country  they 


THE  AMERICAN  CURRENT  FUNDING  SYSTEM      31 

had  no  commercial  banks;  they  had  no  agencies  of 
government  adequate  to  financing  the  necessities  of 
war,  and  none  to  meet  the  demands  of  a  fast  growing 
commerce.  As  a  means  of  meeting  the  exigencies 
of  military  operations,  resort  was  had  to  issues  of 
colonial  and  continental  public  scrip  and  to  foreign 
loans.  When  public  credit  failed,  funds  were  raised 
by  lottery  and  by  temporary  funding  devices.  Com- 
mercial and  industrial  paralysis  left  no  occasion  for 
organization  in  aid  of  private  business  till  after  the 
close  of  the  struggle  for  independence. 

The  country  emerged  from  the  revolutionary  con- 
flict politically  independent,  but  without  money  or 
credit  at  home  or  abroad.  The  people  were  without 
a  currency  other  than  that  imported  in  the  form  of 
foreign  coin;  their  paper  currency  had  depreciated 
to  a  point  that  forbade  other  than  speculative  trading 
or  barter;  they  were  practically  without  adequate 
funds  for  public  or  private  use.    The  welfare  of  the 

commercial  classes  on  the  seaboard 
The  First  Bank  of  j  11^1  ^  ^^^  ^  ^     e 

the  United  States  demanded  the  establishment  of  agen- 
cies of  commercial  credit ;  the  country 
at  large  demanded  a  money  that  would  pass  current 
throughout  the  bounds  of  the  nation.  These  two 
demands  were  met  by  the  organization  of  a  great 
central  commercial  bank  —  the  first  Bank  of  the 
United  States.  The  circumstances  of  the  time  re- 
quired (i)  an  agency  of  such  financial  vigor  and 
strength  as  would  serve  the  Government  in  refunding 


32       THE  BANK  AND  THE  TREASURY 

its  debt;  (2)  an  institution  of  national  scope  such  as 
would  give  to  the  people  a  sound  currency ;  (3)  a  bank 
with  powers  of  discount  equal  to  the  volume  of  com- 
mercial credit  used. 

With  the  expiration  of  the  Charter  of  the  first  Bank 
of  the  United  States,  however,  both  of  these  situa- 
tions had  changed.  In  the  first  place,  the  National 
debt  had  been  refunded  and  the  Government  had 
been  placed  beyond  necessity  other  than  that  which 
Why  the  First  niight  be  met  by  its  current  revenues. 
Bank  was  not  re-  In  the  second  place,  the  controlling 
chartered  interests  of  the  people  had  shifted; 

from  foreign  trade  to  domestic  commerce,  from 
support  of  shipping  to  the  development  of  land 
transportation,  from  merchandising  raw  materials 
and  foreign  products  to  the  capitalization  of  home 
industry,  from  town  building  on  the  coast  to  the 
development  of  the  resources  of  the  interior  the 
commanding  interests  of  the  nation  were  turned. 
The  mint  was  supplying  a  uniform  coinage  for  bank 
reserves;  local  banks  were  supporting  local  interior 
development.  The  first  Bank  fell  with  the  party 
with  which  it  was  identified  —  the  party  of  foreign 
(  trade,  the  party  that  drew  its  principal  support  froni) 
the  seaboard  commercial  interests. 

The  War  of  181 2  was  a  war  directed  against  the 
New  England  coast  towns.  It  was  a  war  of  the  in- 
terior against  the  East.  As  against  England,  it  was 
a  failure;  as  against  the  East,  the  interior  won  a  de- 


THE  AMERICAN   CURRENT  FUNDING   SYSTEM      33 

cisive  victory;  the  enormous  foreign  trade  interests 
of  the  North  Atlantic  seaboard  were  ruined.  The 
The  Second  Bank  National  financial  system  was  reor- 
oj  (he  United  ganized  with  the  party  of  internal  im- 
provements and  home  markets  in 
power.  As  a  means  of  permanently  turning  away 
from  shipping  interests  and  encouraging  the  up- 
building of  home  industry,  the  tariff  of  1816  was 
passed.  War  had  served  either  to  destroy  or  had 
proved  a  temporary  barrier  to  foreign  commerce. 
The  tariff  of  18 16  was  enacted  as  a  permanent  barrier 
to  investment  in  international  trade  —  a  barrier  that 
was  raised  higher  and  higher  through  several  suc- 
cessive enactments.  Party  measures  were  pushed 
for  the  opening  of  interior  transportation  routes,  and 
as  a  means  of  further  strengthening  the  hands  of  the 
administration,  the  second  Bank  of  the  United  States 
was  established.  The  only  banks  that  had  remained 
on  a  specie-paying  basis  during  the  War  of  181 2  were 
the  banks  of  New  England.  The  commercial  rela- 
tions of  the  interior  were  in  a  chaotic  condition;  the 
Central  Government  was  struggling  under  a  new 
load  of  debt;  the  currency  was  disorganized  and  un- 
satisfactory; Treasury  bills  were  at  a  discount.  A 
National  financial  agency  was  again  created,  with  a 
capital  of  thirty-five  million  dollars,  to  perform  the 
double  function  of  refunding  the  National  debt  and 
providing  a  sound  commercial  currency  for  the 
interior. 


34        THE  BANK  AND  THE  TREASURY 

As  the  Charter  of  the  second  Bank  neared  its 
close  the  scene  again  shifted.  Before  the  Federal 
Government  was  in  a  position  to  lend  adequate  aid 
to  the  enormous  demands  from  the  interior  for  trans- 
portation and  internal  improvement  Nev^  York  had 
successfully  financed  the  Erie  Canal.  With  this 
event  begins  a  new  chapter  in  our  financial  history. 
Reasons  for  wind-  ^^  longer  did  local  communities  look 
ing  lip  the  Second  to  the  National  Government  as  the 
^'^  only  agency  adequate  to  carry  on  the 

internal  improvements  demanded.  Besides,  with 
the  development  of  the  resources  of  the  interior,  a 
new  alignment  took  place  which  detracted  still  fur- 
ther from  support  of  National  as  opposed  to  State 
enterprise.  The  industrial  systems  of  the  North  and 
South  worked  to  cross  purposes.  As  soon  as  the 
uplands  were  utilized  and  cotton  was  made  king  the 
constituency  of  the  cotton  and  tobacco  belt  was 
thrown  against  the  tariff,  while  the  industrial  organi- 
zation of  the  North  and  West  demanded  its  con- 
tinuance. 

The  tariff  contest  finally  resulted  in  compromise. 
Both  sections,  however,  weakened  in  their  support 
of  ''National"  as  opposed  to  "State"  institutions 
and  "State"  activities.  Internal  improvements  in 
each  section  were  promoted  from  a  State  or  local 
financial  base ;  the  support  of  a  National  agency  was 
not  needed.  The  South  demanded  ''States-Rights" 
a  a  measure  of  protection  to  its  industrial  and  social 


THE  AMERICAN  CURRENT  FUNDING   SYSTEM      35 

system ;  the  North  and  West  likewise  organized  their 
internal  politics  around  State  functioning,  State  im- 
Internal  improve-  provements,  State  banking,  but  held 
ments  and  State  to  tariff  legislation  for  protection  of 
an  tng  home-industry    as     against     foreign 

competition  and  as  a  means  of  inducing  invest- 
ment of  capital  in  the  development  of  interior  re- 
sources. In  all  but  tariff  issues,  therefore,  ideals  of 
local  self-government  carried  the  day  as  against  the 
party  representing  National  activities.  Jackson  rode 
to  power  in  1828  as  the  popular  representative  of  the 
compromised  "local"  ideal,  while  Adams  and  Clay, 
representing  centralized  National  functions,  failed 
to  retain  political  support.  As  a  logical  sequence, 
the  second  Bank  —  the  instrument  created  to  support 
centralized  National  activities,  the  federal  institution 
—  perished,  and  the  whole  financial  system  went  over 
to  a  State  basis. 

But  evil  days  were  ahead.  The  panic  of  1837  and 
the  depression  following  carried  down  local  enter- 
prises. State  banks  and  State  flotation  schemes  of 
all  kinds  were  brushed  away  like  the  paper  issues 

which  had  preceded  them.  From 
The  teachings  of    .-,  -  r   ,1     •  r     -  -1 

financial  disaster  the  rums  of  their  own  fortunes  the 

people  looked  out  on  bankrupt  cities, 
bankrupt  towns,  bankrupt  counties,  bankrupt  States. 
Over  eight  hundred  State  banks  were  complete  fail- 
ures, while  all  commercial  credit  institutions  that 
survived  within  the  area  of  the  new  development 


3G        THE  BANK  AND  THE  TREASURY 

went  over  to  a  non-specie-paying  basis;  their  issues 
passed  for  what  they  would  bring. 

At  the  same  time,  the  National  party  (the  Whigs), 
by  fusion  with  malcontents  and  with  the  "Ultra- 
States-Righters"  —  the  "nullifiers"  of  the  South  — 
again  gained  control  of  the  Central  Government. 
Attempitoincor-  Another  measure  was  proposed  by 
porate  a  third  leaders  for  a  third  Bank  to  bring 
Federal  bank  ^^^^^  ^^  National  finance,  to  cur- 
rency and  to  commerce.  But  Harrison's  death  threw 
the  administration  into  the  hands  of  the  "Ultra- 
States-Righters,"  the  extreme  advocates  of  localism; 
Congress,  representing  National  functions,  was 
powerless;  the  way  was  blocked  till  again  local  in- 
terests had  readjusted  themselves,  till  strong  local 
institutional  life  reasserted  itself  in  the  election  of 
President  Pierce. 

It  was  in  the  midst  of  this  chaos,  following  the 
panic  of  1837,  that  the  Independent  Treasury  was 
established  as  an  institution  designed  to  protect  the 
finances  of  the  Government  against  becoming  in- 
volved in  transactions  and  institutions  of  private- 
credit.  It  was  out  of  this  same  chaos  that  our  new 
*' independent"  institutions  of  private-credit  arose. 
From  the  working  of  these  two  independent  systems 
side  by  side,  from  experiment,  and  from  adaptations 
made  to  current  necessity  and  to  business  need, 
American  banking  ideals  were  developed.  Before 
the  Civil  War  had  again  thrown  us  into  the  turmoils 


THE  AMERICAN   CURRENT   FUNDING   SYSTEM      37 

of  military  contest  we  had  passed  through  two  more 

financial  crises;   two  industrial  depressions  brought 

American  banking  ideals  to  the  test, 
The  local  insliiii-         i  ^i         j      .    .  •  .1  j 

Hon  retained        ^nd  the  adaptations  then  made,  as  a 

result,  were  again  along  distinctively 
American  lines.  With  no  purpose  of  reverting  to  a 
system  of  National  commercial  credit — with  ideals 
of  "local"  internal  improvement  and  "local"  need 
for  capital  uppermost,  with  "local"  interests,  as  op- 
posed to  "National"  necessity,  the  force  present  to 
give  shape  to  enterprise  and  form  to  legislation  — 
"local,"  "independent"  banking  in  the  various  States 
was  gradually  reduced  to  a  basis  of  safety  and 
economy. 

The  Suffolk  system  of  New  England  had  proved 
itself  adequate  to  keep  bank  issues  on  a  specie-pay- 
Measures  to  ^^g  basis  during  times  of  severest 
strengthen  capi-  strain  —  had  sustained  commercial 
ta  iza  ton  credits  when  in  all  other  sections  they 

had  failed.  This  was  a  system  devised  to  protect 
"local"  institutions  when  the  forces  of  the  country 
and  of  the  Central  Government  were  arrayed  against 
them.  From  the  Suffolk  system  was  adopted  the 
salutary  principle  of  prompt  redemption  of  current 
demand-credit  obligations.  The  Free-Bank  system 
of  New  York  was  distinctly  the  product  of  "local" 
and  State  as  opposed  to  "National"  financial  in- 
terests; this  was  the  result  of  the  adaptation  of  "in- 
dependent"   commercial    credit   institutions   to   the 


^<-^<^'^t<^/Q 


38        THE  BANK  AND  THE  TREASURY 

demands  for  internal  improvement  and  for  the  de- 
velopment of  the  latent  resources  of  a  politically 
organized  "locality." 

By  experience,  and  the  application  of  the  test  of 
business  necessity  and  convenience  to  each  new  de- 
vice, the  States  came  to  distinguish  between  the 
forms  of  credit  used  as  ''money"  (forms  which  were 
Credit-money  dis-  ^0  pass  from  hand  to  hand  without 
anguished  Jrom  question)  and  "bank  credits-of-ac- 
credit-accotmts      ^^^^^„    (^redit-funds    provided    for 

private  use,  created  by  direct  contract  with  the  bank). 
The  "independent"  Free-Bank  system  was  adopted 
by  nearly  all  the  States.  The  safety-fund,  and  the 
idea  of  collaterally  secured  circulation,  was  directed 
toward  the  correction  of  the  "unsoundness"  of  the 
"money"  system  under  a  practice  of  "independent" 
commercial  bank  issues;  collateral  security  for  notes 
was  introduced  to  serve  the  double  purpose  of  giving 
a  market  to  "local-improvement"  stocks  and  bonds, 
and  at  the  same  time  of  avoiding  the  necessity  for 
holding  coin  reserves  against  notes  outstanding;  the 
safety-fund  came  to  be  a  marginal  coin  reserve  to 
insure  payment  in  full  in  case  of  failure  and  on 
forced  sale  of  securities. 
The  business  importance  of  the  distinction  between 

"money    issues"  and  bank  "credit- 
Ttnportanceof  the  ,    ,,         ,        r      j    r        j 

distinction  accounts    used  as  funds  found  expres- 

sion in  the  distinctly  different  provision 
for  the  payment  of  each  of  the  two  forms  of  demand 


THE  AMERICAN  CURRENT  FUNDING   SYSTEM      39 

obligations  of  the  banks.  The  "safety-fund"  and 
"collateral  security"  were  devoted  entirely  to  the 
support  of  "credit-money,"  or  notes  of  the  banks; 
a  first  lien  on  general  assets  was  also  added  for 
further  security  of  bank  "money  issues."  But  such 
provision  for  the  security  of  the  "money- funds" 
left  the  bank  free  to  provide  or  not  to  provide  for  the 
redemption  of  its  "credits-of-account."  As  a  means 
of  protection  to  book-credits,  a  "money-reserve"  re- 
quirement was  introduced  and  a  system  of  inspection 
was  established  to  protect  the  people  against  financial 
impotence  and  fraud.  The  necessity  for  capital  (the 
necessity  for  invested  funds  as  equipment  for  a  busi- 
ness institution  offering  credit-funds  to  a  community) 
came  to  be  recognized  and  laws  were  passed  to  pre- 
vent banking  without  capital-resources,  or  what  was 
known  as  "wild-cat"  banking.  In  all  of  these  adap- 
tations, however,  in  all  of  the  legislation  and  provis- 
ions for  administrative  control  the  leading  idea  was 
one  of  local  need,  local  service,  local  development,  as 
opposed  to  "National"  necessity  or  "paternalistic" 
enterprise. 

The  Separation  oj  the  Institution  of  Money 
Issue  jrom  that  of  Credit- Account 

Fortunate  it  was  for  our  financial  system  that  the 
Civil  War  occurred  at  a  time  when  banking  ideals 
had  come  to  be  so  well  crystallized  and  when  the 
necessity  for  a  common  currency  had  come  to  be  so 


40        THE  BANK  AND  THE  TREASURY 

generally  felt.  We  were  quite  ready  to  have  a  uniform 
practice,  a  common  law,  a  central  administration  along 
Estahlishment  oj  lines  of  previously  proved  experience 
a  strictly  Ameri-  — a  System  that  would  preserve  all 
can  system  ^^  ^j^^  salutary  principles  worked  out 

under  American  business  conditions,  and  one  which, 
by  uniformity,  was  adapted  to  a  wider  commercial 
activity.  The  complete  taking  over  of  the  money 
functions  by  the  Treasury,  under  necessities  of  war, 
and  the  reorganization  of  our  independent  com- 
mercial-banking institutions  under  the  National  Bank 
Act,  were  the  last  steps  in  the  final  establishment  of 
the  American  system  of  currency  and  banking. 


Chapter  IV 

NATIONAL    CREDIT-MONEY   AND    THE 
NATIONAL  BANK 

Again  attention  is  called  to  the  fact  that  banking 
ideals  in  America  had  developed  from  strictly  Amer- 
ican conditions;  that  as  a  result  we  had  worked  out 
a  system  unique ;  also  that  intelligent  banking  opinion 
was  fairly  well  settled  at  the  time  the  nation  found 
itself  in  the  throes  of  civil  strife.  We  were  still 
suffering  from  the  results  of  the  panic  of  1857,  and 
there  was  engraved  on  the  memories  of  older  bankers 
the  record  of  failures  in  1837  and  1847.  The  nation 
also  realized,  as  a  matter  of  experience,  that  these 
years  of  financial  failure  each  had  been  followed  by 
an  era  of  industrial  depression  and  financial  reor- 
ganization. It  was  commonly  believed  that  lack  of 
uniformity  in  laws,  conflicts  of  systems,  and  rival 
advantages  offered  to  incorporators  by  one  State 
bidding  against  another,  under  conditions  favoring 
loose  banking  practice,  had  contributed  to  this  con- 
fusion. Before  the  greenback  came  to  take  a  prom- 
inent part  in  our  circulation,  the  credit-money  of  the 
nation,  in  the  form  of  "notes-of-hand"  (issues  of 
State  banks),  were  in  such  condition  that  one  doing 

[413 


42  THE  BANK  AND   THE  TREASURY 

business  was  required  to  keep  constantly  before  him 
a  current  list  of  quotations  as  to  prices  of  ^' bills," 
and  then  he  ran  the  risk  of  loss  in  exchange.  Still, 
Confusion  in  the  advantages  found  in  the  local  in- 
credii-money  at  be- dependent  institution  for  fostering 
ginning  of  War    u^^^^y,  interests  were  so  great  that 

all  this  confusion  and  loss  could  be  suffered  with 
scarcely  a  suggestion  of  return  to  central  banking  — 
to  a  central  "Federal"  institution  with  its  large  capi- 
tal, its  branches,  and  its  uniform  currency.  Even 
during  the  War,  when  Federal  ideals  were  strong, 
there  was  no  large  business  interest  ready  to  advocate 
or  even  listen  to  proposals  for  a  central  Federal  bank. 
In  fact,  it  was  the  fear  that  such  might  be  the  out- 
come of  a  Federal  law  which  stood  for  a  long  time  in 
the  way  of  establishing  a  uniform  National  system 
in  conformity  with  existing  ideals. 

Conversion  of  the  Treasury  into  an  Exclusive 
Agency  oj  Credit-Money-Issue 

When  the  Government  found  itself  confronted  by 
the  necessity  of  supporting  armies  in  the  field,  when 
it  became  necessary  to  maintain  an  armament  with 
a  fighting  force  of  half  a  million,  when  its  expendi- 
Issiies  of  Govern-  tures  amounted  to  millions  per  day, 
ment  credit  for  it  found  itself  equipped  for  such  an 
currency  undertaking  with  an  independent  (but 

empty)  Treasury,  and  with  a  commercial-credit  sys- 
tem entirely  divorced  from  the  Federal  State;  the 


NATIONAL  CREDIT-MONEY  AND  THE  BANK       43 

finances  of  the  country  were  organized  on  independ- 
ent commercial  lines  rather  than  on  those  intended 
for  Government  service.  The  conversion  of  this 
empty  independent  Treasury  into  an  active  financial 
agency  to  provide  current  funds  for  the  Government 
became  a  matter  of  necessity,  and  as  the  easiest  and 
most  expeditious  way  of  providing  such  funds  the 
Treasury  assumed  issue  functions. 

The  notes  (demand-credit  obligations)  of  the 
Treasury  entered  into  circulation  in  competition  with 
the  mixed  and  inefficient  system  of  bank-note  cur- 
rency. At  first  (as  demand  obligations  for  the  pay- 
Govemment  credit  ment  of  gold  and  silver)  they  passed 
becomes  money  at  par.  Later,  being  valued  at  less 
standard  ^j^g^^^  specie-paying  bank-notes,  they 

were  made  legal-tender  to  give  them  currency.  As 
an  incident  to  this,  the  whole  commercial-credit  sys- 
tem passed  over  to  a  Government  "paper  standard." 
The  banks,  failing  to  provide  a  "coin-reserve"  for  the 
redemption  of  their  demand  obligations,  immediately 
accepted  the  situation.  They  provided  themselves 
with  a  cheaper  form  of  legal-tender  money  for  re- 
serves and  sold  their  coin,  using  instead  issues  of  the 
Treasury  for  the  redemption  of  notes.* 

At  first,  from  National  necessity,  Treasury-notes 

*This  practice  became  general  with  banks  in  every  section  except  the 
Pacific  coast.  The  practice  was  systematized  in  the  East  by  action  of  the 
principal  Clearing-House  Associations;  Boston  was  the  last  of  the  large 
cities  to  adopt  the  United  States  note  as  a  standard  for  payment.  August 
27,  1861,  that  Association  voted  that  any  bank  which  might  conform  to 
the  agreement  entered  into  by  the  banks  in  New  York  and  Philadelphia, 


44        THE  BANK  AND  THE  TREASURY 

were  issued  in  settlement  of  demands  against  the 
Government;  after  the  issues  of  the  Treasury  had 
been  accepted  by  the  banks  as  a  standard  for  pay- 
ment of  their  own  credit-accounts  the  notes  of  the 
Displacement  of  Government  were  found  preferable  to 
the  State  bank-  the  diversified  issues  of  banks.  Gov- 
"^^^  ernment  issues  at  least  provided   a 

uniform,  and  therefore  more  acceptable  form  of 
credit-money.  This  preferment  on  the  part  of  the 
banks,  this  decision  to  accept  United  States  notes  as 
reserves,  this  better  service  rendered  by  the  Treasury 
as  an  agent  of  money-issue,  paved  the  way  to  the  tax 
which  eliminated  the  credit-issues  of  banks  from  our 
money  circulation.*  From  that  time  to  the  present 
all  our  "credit-money"  has  been  issued  by  the  Cen- 
tral Government,  the  banks  confining  their  credit 
activities  entirely  to  commercial  functions,  using  the 
credit-money-issues  of  the  Government  for  their  re- 
serves. From  that  day  to  this  the  American  money 
question  has  been  an  entirely  separate  and  distinct 

with  reference  to  the  National  loan,  could  deposit  with  the  Clearing- 
House  Committee  "Treasury-notes"  of  that  loan  and  receive  in  exchange 
certificates  of  the  "loan  committee"  to  an  amount  not  exceeding  ninety 
per  cent  of  the  par  value  of  such  Treasury-notes.  These  certificates  were 
to  be  received  at  the  Clearing-House  in  settlement  of  balances.  The 
notes  were  later  adopted  as  a  basis  for  payment  in  lieu  of  "coin." 

*True,  the  ten  per  cent  tax  imposed  on  State  bank-notes  was  the  im- 
mediate cause  of  the  retirement  of  State  bank-notes.  But  if  the  green- 
back and  the  National  banking  system  had  not  been  considered  more 
advantageous,  the  banks  would  not  have  withdrawn  their  opposition  to 
tlieir  use  and  adoption,  and,  furthermore,  would  not  have  voluntarily 
accepted  the  change.  There  can  be  no  doubt  that  the  uniform  system 
of  greenbacks  and  "Government"  bank-notes  was  in  every  way  more 
acceptable  and  more  serviceable  to  the  people  than  the  complicated, 
hazardous,  and  uncertain  system  of  independent  bank  issues. 


NATIONAL   CREDIT-MONEY   AND   THE   BANK       45 

one  from  the  American  commercial  banking  problem, 
and  every  attempt  to  treat  the  two  questions  without 
distinction  has  led  to  confusion  of  thought. 

The  Creation  of  a  Unijorm  System  oj 
Commercial-Credit 

In  the  reduction  of  our  "commercial-credit"  to  a 
uniform  system  the  same  National  necessity  was  the 
immediate  cause.  It  was  the  need  of  the  Govern- 
ment for  current  funds  that  reduced  credit-money- 
issues  of  the  country  to  a  uniform  basis  in  the  Treas- 
ury-notes; it  was  the  continuing  public  need  for 
A  national  bank-  current  funds  that  finally  gave  us 
ing  system  from  uniform  institutions  of  commercial- 
piMic  necessity     ^^^^-^     Secretary  Chase  saw  in  the 

commercial  bank  the  possibility  of  an  enlarged  mar- 
ket for  bonds.  The  practice  among  the  States  under 
the  Free-Bank  system  suggested  a  practical  method 
for  utilizing  this  market. 

Before  this  could  be  done,  however,  it  was  neces- 
sary to  incorporate  the  many  "local"  banking  sys- 
tems under  National  law.  But  to  make  such  a 
National  system  a  success  would  require  voluntary 
consent  on  the  part  of  both  banks  and  bank  patrons. 
Incorporated  the  General  respect  and  voluntary  con- 
best  American  sent  must  be  gained  through  devising 
experience  ^  National  law  that  would  serve  the 

commercial  purpose  better  than  had  the  mixed  and 
uncertain  State-bank  systems.     The  inducement  to 


46  THE  BANK  AND  THE  TREASXJRY 

voluntary  consent  which  Secretary  Chase  and  his 
advisors  offered  was  a  National  Banking  Law,  into 
which  were  incorporated  all  of  the  most  wholesome 
measures  —  the  best  banking  ideals  that  had  been 
evolved  during  nearly  half  a  century  of  independent 
commercial  banking  experience.  These  ideals  were 
brought  together  and  welded  into  a  consistent  plan 
—  one  that  commended  itself  both  to  bankers  and 
to  established  business  interests. 

The  manner  in  which  this  law  represented  and 
still  represents  the  "local"  ideal  is  caught  from  the 
language  of  ex-Comptroller  Dawes,  in  a  recent  speech 
before  the  Kansas  Bankers'  Association:  "It  has 
been  built  up,  not  from  some  central  institution  com- 
bined with  numerous  branches  which  discourage  the 
banks  in  small  towns,  but  has  been  built  up  from 
Organized  fifteen  thousand  differentiated  banking 

around  local,  units,  until  in  banking,  as  in  other 
banking  needs  ^^^^  industries  of  these  United  States 
of  ours,  is  coming  a  day  of  commercial  domination 
of  the  world.  It  is  the  little  men  whom  we  have 
protected  in  this  Government."  The  National  bank- 
ing system  is  a  part  of  that  National  policy  evolved 
"to  let  the  little  men  get  on  in  the  country,  in  order 
to  let  the  little  bank  get  into  operation,  in  order  to 
let  the  little  manufacturer  get  into  operation,  and  to 
not  cut  off  from  their  credit  those  people  who,  start- 
ing from  small  beginnings,  have  brought  us  into  this 
great  prosperity  which  we  all  enjoy  and  which  is  so 


NATIONAL  CREDIT-MONEY  AND  THE  BANK         47 

widely  and  evenly  distributed  throughout  this  great 
country  of  ours." 

The  American  System  oj  Sound  Money 

The  American  credit-money-system,  in  its  final  evo-  || 
lution,  is  essentially  a  system  of  Government  obliga-  | 
tions  for  the  payment  of  gold  on  demand.     In  the  I) 
effort  of  the  American  people  through  the  last  cen-  •' 
tury  to  obtain  a  "uniform"  currency,  the  Independ- 
ent Treasury  has  been  maintained,  and  has  finally 
become  the  only  institution  of  credit-money-issue. 
Uniformity  of  valuation  of  all  our  money-issues  is 
secured  through  this  central  institution  by  a  process 
of  immediate  redemption.     In  the  interest  of  "sound 
money,"  and  as  a  provision  directed  toward  meeting 
the  demands  for  gold  payment  arising  out  of  these 
credit-money-issues,  a  gold-reserve  is  set  aside  in  a 
special  department  of  the  Treasury  known  as  the 
Department  of  Issue  and  Redemption.     Here  is  kept 
the  $150,000,000  gold-reserve;  here  all  demands  for 
gold  obligations  arising  out  of  credit-money-issues 
may  be  presented  and  honored ;  here,  in  fact,  and  in 
practice,  all  forms  of  money  are  made  interchange- 

Credit-moneys  able.  If  the  holder  of  silver  wishes 
issued  and  re-  i      1       i  i  m 

deemedbytheNa-  greenbacks  he   may  exchange  silver 

lional  Treasury  for  notes ;  if  he  has  gold,  and  for  con- 
venience wishes  silver  certificates,  these  may  be  had ; 
if  he  has  any  form  of  money  other  than  gold,  and 
wishes  standard  money,  he  may  obtain  this  in  ex- 


48        THE  BANK  AND  THE  TREASURY 

change,  at  par,  without  discrimination.  Thus  every 
form  of  money  is  issued  by  the  Treasury,  and 
all  forms  other  than  gold  are  made  demand  obliga- 
tions for  gold  payment.  Furthermore,  the  means  of 
meeting  these  obligations  are  at  hand:  first,  in  the 
form  of  a  "reserve"  large  enough  to  meet  current 
demands,  and,  second,  by  making  the  credit-money- 
issues  redeemed  a  first  lien  on  the  general  resources 
and  revenue  powers  of  the  Government.  These 
credit-money-issues  of  the  Treasury  are  made  legal- 
tender  for  the  payment  of  commercial-credits. 

The  American  System  of  Banking 

The  American  banking  system,  on  the  other  hand, 
is  essentially  an  independent  institution  of  commer- 
cial-credit. It  has  for  forty  years  been  entirely  di- 
vorced from  money-issue  functions,  except  as  an 
asrent  of  the  Government  for  the  conversion  of  bonds 
An  independent  ^^^^  demand  notes.  The  service  that 
system  oj  com-  it  renders  is  one  of  furnishing  com- 
mercial-credit  j^^j-cial  credit-funds  to  its  business 
constituency  in  the  form  of  book-credit  accounts. 

The  legal-tender  "credit-money-issues"  of  the 
Government  are  contracts  to  pay  gold  coin;  the 
Comparison  oj  "commercial-credit-accounts"  offered 
money  and  hank-  to  the  public  by  the  banks  are  con- 
tng  sys  ems  tracts  to  pay  legal-tender  money.  The 

Independent  Treasury  protects  the  "credit-money" 
system   by   maintaining   a   "reserve"  of  gold.     As 


NATIONAL  CREDIT-MONEY  AND  THE  BANK        49 

all  the  reserves  and  the  revenue  power  of  the 
Treasury  are  organized  for  and  directed  toward  the 
maintenance  of  a  convenient  form  of  legal-tender 
money  in  its  integrity,  so  it  is  intended  that  the  com- 
mercial bank  shall  protect  its  ''demand-credit-ac- 
counts" by  keeping  a  money-reserve  adequate  to 
meet  current  demands,  fortified  by  all  the  capital- 
resources  of  the  bank.  It  has  come  to  be  recognized 
that  the  bank's  service  to  the  country  is  not  one  of 
'"money-issue."  When  money  is  needed,  a  customer 
cares  not  whether  it  is  in  bank-notes,  greenbacks, 
gold  certificates,  or  notes  of  1890,  so  long  as  it  is 
"sound;"  i.e.,  so  long  as  he  knows  that  he  may 
obtain  gold  or  something  as  valuable  on  demand. 
He  may  obtain  "money"  as  cheaply  from  a  Treasury 
office  as  from  a  bank. 

The  chief  service  of  the  bank  is  one  of  purchasing 
good,  sound,  commercial  paper  offered  for  sale  in  the 
community  as  a  means  of  obtaining  funds  to  meet 
the  current  needs  of  enterprise,  and  (as  the  most 
convenient  form  of  funds)  to  be  able  to  give  "good, 
sound,  commercial  bank-credit"  in  return.     Under 

a  system  which  permits  the  banks  to 
The  public  ser-     .  .         r  1         1     ^i  ^i     ^ 

vice  of  the  bank    ^^sue  notes-of-hand,  the  reason  that 

the  bank  gives  to  its  customers  funds 

in  this  form  is  that  it  is  to  the  bank's  advantage  to 

do  so,   and  not  because  the  customer  prefers  the 

bank-note  to  Government  issues.     But  the  American 

business  public  has  found  that,  in  over  ninety  per 


50        THE  BANK  AND  THE  TREASURY 

cent  of  its  business,  funds  in  the  form  of  a  ''bank- 
account"  are  more  convenient  to  the  customer,  and 
they  have  seen  fit  to  take  away  from  the  bank  the 
power  of  money-issue  in  the  interest  of  pubHc  safety. 
Under  our  system,  the  commercial  bank,  being  de- 
prived of  credit-money-issue  privileges,  renders  two 
services:  (i)  It  furnishes  a  market  for  commercial 
paper;  (2)  it  furnishes  a  form  of  credit-funds  more 
convenient  for  use  than  money  itself. 

But  the  public  is  quite  as  much  interested  in  know- 
ing that  the  credit-accounts  of  banks  will  remain 
"sound"  —  i.e.,  will  be  paid  on  demand  in  "sound" 
legal-tender  money  of  the  Government  —  as  it  is 
that  the  Government  shall  furnish  "sound"  legal- 
tender  money,  for  under  the  law  of  greater  economy, 
over  nine-tenths  of  the  business  is  done  on  this  form 
of  obligation  when  protection  is  given  against  "un- 
sound" banking.  The  method  employed  under  this 
Need  for  sound-  Unique  American  system  of  independ- 
nessin  batik-  ent  commercial  banking  is  to  require 
^^^  *  banks   to   maintain   their   capital-re- 

sources unimpaired,  and  to  keep  a  "reserve"  of 
legal-tender  currency  sufficient  to  protect  the  accounts 
which  they  have  sold  to  the  public  for  business  use. 
When  thus  protected  we  have  a  system  of  credit 
thrice  compounded:  (i)  a  system  of  Government 
"legal-tender  credit-money-issues"  based  upon  the 
gold  standard;  (2)  a  system  of  "commercial  bank- 
credit-funds"  (book-accounts)  based  on  legal- tender 


NATIONAL  CREDIT-MONEY  AND  THE  BANK        5i 

money;  (3)  a  system  of  "business-credit"  looking  to 
the  bank-account  for  means  of  payment.  It  is  the 
current  opinion  that  under  the  American  system, 
through  the  Independent  Treasury,  we  have  already 
secured  to  ourselves  a  "sound  money";  the  problem 
now  before  us  is  one  of  securing  for  ourselves  "  sound 
commercial  bank-credit." 

The  So-called  "Issues^^  of  National  Banks 

To  this  conclusion  and  summary  one  objection 
will  be  urged,  viz.,  that  the  banks  called  National 
banks  have  retained  issue  functions.  This  conten- 
tion will  not  be  admitted,  and  in  this  lies  one  of  the 
minor  financial  fallacies  of  the  time.  As  an  institu- 
tion of  commercial-credit,  our  National  bank  is  not  a 
bank  of  issue.  It  would  be  as  logical  to  call  banks, 
which  deposit  gold  and  receive  in  return  gold- 
Clearing-House-certificates,  banks  of  issue ;  it  would 
be  as  justifiable  to  so  regard  a  State  bank  or  private 
bank  that  has  deposited  gold,  silver,  or  currency  in 
the  Treasury  and  received  certificates  to  represent 
them.  Bank-notes,  it  is  true,  are  at  present  a  form 
of  money,  but,  for  the  issue  of  these,  the  bank  occu- 
pies a  position  of  agency  of  the  Government  for  the 
Banks  an  agency  oj  conversion  of  bonds  into  notes.  The 
the  Government  for  note-issue   power  was  not  intended 

bo  fid  CO^WPT^IO'VL  r  •  •     1 

as  a  means  of  meetmg  a  commercial 
demand;  it  was  given  purely  as  an  accommoda- 
tion   to    the    Government  for  its  own  ends.     As  a 


52       THE  BANK  AND  THE  TREASURY 

means  of  creating  a  bond-market  when  the  Treasury 
was  in  need  of  coin  the  bank  was  allowed  to  buy 
coin  bonds,  i.e.,  to  exchange  gold,  or  gold  market 
equivalents,  for  bonds;  then  (on  depositing  the  bond 
thus  purchased  with  the  Government  as  security  to 
a  promise  to  deliver  a  definite  amount  of  money  to 
the  Treasury)  the  bank  obtained  a  form  of  paper 
money,  called  "National  currency"  or  bank-notes, 
for  use  in  its  business,  receiving  the  interest  on  the 
bond  as  an  inducement  for  the  exchange. 

The  Government  issues  the  bank-note  in  the  same 
sense  that  the  Clearing-House  issues  Clearing-House 
loan-certificates.  These  notes  are  not  bank-credits 
issued  in  the  course  of  a  commercial  banking  busi- 
ness. The  value  of  the  note  does  not  rest  on  the 
credit-contract  of  the  bank,  but  on  a  contract  with 
the  Government  which  in  turn  rests  on  the  collateral 
securities  deposited  with  the  Treasurer,  i.e.,  on  Gov- 
ernment credit.  The  notes  were  not  "issued"  by 
the  bank,  but  were  purchased  or  borrowed  from  the 
Government,  and  as  a  form  of  money  the  immediate 
Government  ^^^t  ^^  the  bank  is  more  than  that  of 

issues  notes  to  any  other  form  of  money  obtainable. 
the  hanks  j^  -^  therefore  thoroughly  misleading 

and  tends  to  involve  the  subject  of  currency  and 
banking  in  mystery  to  speak  of  this  form  of  currency 
as  bank-money.  It  is  quite  as  misleading  to  attempt 
to  align  this  practice  with  any  experience  under  other 
systems  of  banking  in  discussion  of  "elastic  bank- 


NATIONAL  CREDIT-MONEY  AND  THE  BANK        .58 

issues."  Under  the  American  system  the  National 
''bank-note"  is  a  form  of  money  issued  by  the  Gov- 
ernment to  and  through  the  bank  as  a  corporate 
agent  of  the  Government. 


Chapter  V 

THE  DEMAND   FOR  A   '' SOUND"    AND    '' ELASTIC" 
SYSTEM   OF   BANK-CREDIT 

The  solution  which  we  have  given  to  the  problem 
of  ''sound  money"  has  been  by  taking  our  money- 
issues  entirely  out  of  the  hands  of  private  concerns 
and  putting  them  under  a  department  of  Govern- 
ment. By  so  doing,  however,  we  have  left  our 
Opinion  as  to  "  commercial-credit "  entirely  in  the 
need  jar  greater  hands  of  private  individuals  and  cor- 
elasticity  porations.    That  greater  elasticity  is 

needed  and  that  some  change  should  be  made  in  the 
National  Bank  Act  to  this  end,  all  are  agreed.  Opinion 
differs  only  as  to  what  the  character  of  this  change 
should  be.  And  this  difference  grows  out  of  a  differ- 
ence of  view  as  to  the  method  by  which  elasticity  in 
credit  obligations  may  be  attained  without  restricting 
business  accommodations. 

Two  Schools  of  Banking  Opinion  as  to  Method  oj 
Obtaining  Elasticity  and  Sound  Banking 

Proceeding  from  the  assumption  that  greater  elas- 
ticity is  needed  as  a  common  point  of  departure, 
argument  has  gone  out  on  two  distinct  lines;  bankers 

[54] 


"sound"   and   "elastic  '   BANKING  55 

have  divided  into  two  schools  of  opinion  diametri- 
cally opposed.     The  one  has  reached  the  conclusion 

that  "branch-banking"  and  "cur- 
Points  of  differ-  -u        j  •   i  .    ,i' 

^^^g      '  rency  based   on   commercial  assets 

will  secure  the  desired  end ;  the  other 
has  as  zealously  urged  "independent  banking"  and 
"credit-accounts"  (deposits)  based  on  independent 
and  adequate  capitalization.  On  examination  of 
the  arguments  used  by  these  two  schools  there  ap- 
pears not  only  the  fundamental  difference  in  their 
appreciation  of  the  relation  of  the  problem  of  "elas- 
ticity" to  financial  "soundness,"  but  the  reasons  for 
this  divergence  in  conclusions  as  to  the  remedies  to 
be  applied  are  also  apparent.  Taking  premises  for 
argument  there  has  been  a  wide  difference  in  their 
conception  of  the  "system"  to  be  modified,  and  also 
a  lack  of  agreement  as  to  the  form  of  "bank-credit" 
to  which  elasticity  is  to  be  given. 

The  "Commercial  Assets''  Banking  School 

Mr.  Eckels,  representing  the  ideas  of  the  "branch- 
bank",  "commercial  assets  banking"  constituency, 
has  refused  absolutely  to  take  into  account  the  fact 
that  we  have  in  America  a  system  that  has  grown  out 
of  American  conditions,  and  therefore  one  that  must 
be  considered  from  the  standpoint  of  further  adap- 
tation to  American  financial  and  industrial  interests. 
He  and  his  followers  show  that  branch-banking  has 
produced  good  results  in  other  fields,  and  conclude 


56  THE  BANK  AND  THE  TREASURY 

that  it  would  also  produce  equally  good  results  if 

grafted  upon  our  own  industrial  plant.     They  show 

that  the  bank-note  circulation  of  Eng- 
CJmracter  of  their  110^^1       i      t     i       1      /^ 
claims  land,   Scotland,    Ireland,    Germany, 

Canada,  etc.,  has  adjusted  itself  to  in- 
creased and  decreased  business  demands  for  current 
funds;  it  is  therefore  assumed  that  the  English  or  the 
Scotch  or  the  German  branch-bank  would  work  here 
better  than  our  own  system  of  decentralized,  inde- 
pendently capitalized  banks. 

This  reasoning  from  analogy  might  have  been  put 
with  convincing  force  if  they  had  first  shown  that  the 
American  business  demand  and  the  American  bank- 
ing system  were  the  same  sort  of  demand  and  a 
system  similar  to  those  from  which  their  analogies 
are  taken.     Their  fundamental  error  lies  in  failure 

to  appreciate  that  there  are  no  par- 
I'^g^wmlZlogy  allels  in  either.     In  the  first  place,  the 

discussion  is  not  with  reference  to  an 
English  system  of  banking,  a  Scotch  system  or  a 
German  system;  what  we  have  to  do  with  is  an 
American  system.  In  the  second  place,  the  form  of 
"bank-credit"  demanded  by  the  American  business 
man  is  not  a  bank-note,  but  a  "credit-account"  for 
the  use  of  the  customer  of  the  bank.  To  show  by 
direct  quotation  Mr.  Eckels'  line  of  departure:  "Com- 
merce wants  (i)  a  note-issue  which  is  sound,  and  (2) 
one  which  from  day  to  day  in  its  volume  meets,  not 
only  in  the  cities  of  great  commercial  undertaking, 


"sound     and     elastic     banking  57 

but  upon  the  frontier  and  in  sparsely  populated 
places,  the  needs  of  the  people  in  their  transactions, 
.  .  .  in  their  transferring  of  property  from  one  to 
another y  This  is  the  first  premise  in  the  reasoning 
of  the  "commercial  assets  banking"  school. 

All  admit,  and  our  whole  past  history  supports  the 
conclusion,  that  the  American  people  wish  a  "sound" 
credit-money  when  they  wish  credit-money  at  all; 
but  it  is  affirmed  by  Mr.  Eckels'  opponents  that  his 
assumption  is  wrong  when  he  further  says  that  the 
American  people  wish  a  "note-issue  upon  the  part 
of  the  bank."  This,  it  is  urged,  is  what  the  Ameri- 
can people  have  been  drifting  away  from  since  1837, 
Note-issiies  for  ^^^  what  they  completely  abandoned 
the  use  of  the  forty  years  ago.  The  American  peo- 
"^  pie  have  not  seen  an  "issue"  of  a 

bank  —  using  the  word  in  the  same  sense  that  Mr. 
Eckels  uses  it  in  his  analogies  drawn  from  Canadian 
and  European  practice  —  since  the  Civil  War.  The 
school  which  he  represents  fail  to  appreciate  the 
fact  that  the  American  people  have  completely  di- 
vorced their  system  of  "credit-money-issue"  from 
their  system  of  "commercial-bank-credit." 

The  ''Capital  Assets''  Banking  School 

The  other  school  is  ably  represented  by  Mr. 
Dawes.  While  in  a  measure  this  school  has  failed 
to  appreciate  the  full  import  of  the  institutional  dis- 
tinction between  the  American  and  other  systems, 


58        THE  BANK  AND  THE  TREASURY 

in  their  reasoning  about  "elasticity"  they  have  pro- 
ceeded from  a  proper  appreciation  of  the  form  of 
Bank-accounts  circulating  medium  demanded.  Quot- 
used  by  business  ing  from  Mr.  Dawes  for  a  statement 
community  ^^  ^j^jg  ^j^^.  a^j^^^  -g  ^j^^,  ^^^^  j^^. 

portant  function  of  a  bank?  It  is  not  the  note- 
issuing  function  .  .  .  the  most  important  function 
which  banks  exercise  in  any  community  is  that  of 
producing  purchasing  power  [credit-accounts  of  cus- 
tomers] in  that  community.  ...  By  that  method 
through  those  simple  operations  of  banking  [the 
purchasing  of  commercial  paper  and  giving  to  the 
customers,  in  exchange,  accounts  on  the  books  of 
the  bank],  there  has  been  built  up  in  this  country 
to-day  a  purchasing  power  of  something  over  nine 
billion  dollars,  whereas  the  total  amount  of  Govern- 
ment money  in  circulation  —  gold,  silver,  and  paper 
—  is  about  $2,250,000,000.  It  is  the  check  and 
draft  circulation  against  that  tremendous  credit 
balance  which  furnishes  the  currency  [current  funds] 
with  which  over  ninety  per  centum  of  our  total  trans- 
actions are  done.  .  .  .  We  have  in  this  country  the 
most  elastic   currency  which   the   world   has  ever 

known,  in  this  check  and  draft  cur- 
Elasticity  in  t^.,  .i  •   1    i. 

credit-accounts      ^^^^cy.  ...  Did  you  ever  thmk  how 

elastic  the  check  and  draft  currency 
of  the  United  States  is?  Why  in  the  year  1900  the 
clearances  of  the  city  of  New  York  alone  were  thirty- 
one  billions  of  dollars  —  not  millions  —  thirty-one 


"sound"  and  "elastic     banking  59 

billions  of  dollars  greater  than  they  were  in  1897, 
and  they  were  five  billions  of  dollars  less  in  1900  than 
they  were  in  1899.  Just  think  of  the  elasticity  of 
that  magnificent  currency  which  has  been  built  up 
in  this  country  by  this  system  of  differentiating  bank- 
ing among  the  fifteen  thousand  banks  scattered  over 
these  United  States." 

Recognizing  that  the  chief  service  rendered  by  the 
commercial  bank  is  one  of  providing  its  customers 
with  credit-accounts  (deposits)  for  business  use,  this 
second  school  of  banking  opinion  have  strongly  im- 
pressed on  their  faith,  that  there  is  at  present  no 
limit  to  the  elasticity  of  the  form  of  funds  in  current 
use  except  that  imposed  by  the  bank  itself;  elasticity 
is  limited  only  by  the  amount  of  capital  support 
given  to  accounts  outstanding.  They  strongly  advo- 
Limit  to  elasticity  cate  increased  financial  "soundness" 
imposed  by  hanks  as  a  remedy  for  inelasticity,  and  as  a 
themselves  means  to  this  end  they  further  advo- 

cate the  principle  of  banking  on  the  "capital  re- 
sources" of  the  bank  instead  of  doing  business  with 
"issues"  based  on  "commercial  assets." 

Since  the  exchange  of  credit-accounts  for  com- 
mercial paper  is  the  chief  business  of  the  bank,  and 
The  limitation  since  these  credit-accounts  (deposits) 
one  oj  "  sound-  are  the  chief  form  of  funds  used  in 
^^■^■^  the  community,  the  underlying  pre- 

mise of  their  belief  is  that  the  first  duty  of  the  bank  is 
to  make  these  credit-accounts  "sound."      Soundness 


60        THE  BANK  AND  THE  TREASURY 

is  here  used  in  the  same  sense  that  it  was  understood 
to  mean  in  the  recent  money  controversy.  The  bank- 
account  is  sold  to  the  customer  (or  exchanged  for  his 
note)  to  be  used  as  current  cash  in  his  business. 
What  the  customer  wants  to  know  is  that  it  is  as 
good  as  gold.  And  what  the  bank  must  do  to  insure 
this  result  is  to  be  able  to  redeem  its  credit-contract 
on  demand. 

The  ^^ Soundness''''  oj  a  Bank^s  Credit 

There  are  two  ways  in  which  credit-contracts  may 
be  met;  viz.,  by  "payment"  and  by  "settlement." 
Payment  is  the  satisfaction  of  a  credit  obligation  by 
delivery  of  the  amount  of  money  contracted  for. 
Two  methods  of  Settlement  is  the  satisfaction  of  a  con- 
satisjying  a  credit  tract  for  future  delivery  by  a  new 
0  iga  ton  contract  or  acceptance,  in  lieu  of  de- 

livery or  payment.  Ability  to  pay  depends  on  the 
ownership  or  possession  of  money,  or  something 
which  can  be  converted  into  cash,  for  delivery  when 
the  credit-contract  is  due  and  demand  is  made; 
ability  to  settle  depends  on  the  power  of  the  one 
obligated  to  offer  something  v^^hich  will  be  acceptable 
to  the  creditor  in  lieu  of  legal-tender  money. 

In  campaigns  for  currency  and  banking  reform, 
these  two  methods  of  satisfaction  of  credit-demands 
have  been  the  first  premises  of  the  two  opposing 
schools  of  financial  thinking.  Recurring  periods  of 
relapse  from  speculative  excess,  cycles  of  decreasing 


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"sound"  and  "elastic"  banking  61 

assets  and  proportionately  increasing  liabilities,  have 
caused  issue  to  be  joined  between  them.  The  school 
The  dividing  line  in  which  have  pleaded  for  reform  based 
campaigns  for  finan-  on  ability  to  ^a}^,  have  styled  their  ar- 
cial  soimdness  gument  a  plea  for  financial  "sound- 

ness." The  school  which  have  urged  measures  for 
settlement,  without  being  required  to  fulhl  their  con- 
tracts for  future  delivery  of  money,  have  been  char- 
acterized by  their  opponents  as  "inflationists."  But, 
whatever  may  be  chosen  as  terms  properly  to  repre- 
sent these  two  financial  creeds,  it  must  be  recognized 
that  each  is  an  attempt  to  solve  the  problem  of  liqui- 
dation —  the  one,  by  the  introduction  of  methods 
which  will  insure  a  larger  proportion  of  assets  to 
credit  issued,  the  other,  by  a  provision  for  new  issues 
of  credit  liabilities  to  meet  those  already  outstanding. 
It  may  be  further  observed  that,  in  all  of  these  con- 
tests, the  one  school  have  stood  for  the  strict  fulfil- 
ment of  existing  contracts,  and  have  sought  to  protect 
business  against  the  evil  of  future  excesses  of  credit- 
issue,  while  the  other  school  have  sought  to  obtain  re- 
lief from  a  present  emergency,  arising  out  of  demands 
for  the  delivery  of  money  on  existing  contracts  of 
credit. 

In  1893-96,  attempt  was  made  to  solve  the  prob- 
lem of  liquidation  by  establishing  371.5  grains  of 
silver  as  the  standard  of  payment  of  existing  liabili- 
ties and  for  the  valuation  of  assets.  With  the  price 
of  silver  as  it  then  stood,  this  device  would  at  once 


62       THE  BANK  AND  THE  TREASURY 

have  doubled  the  proportion  of  assets  to  credit  Habih- 

ties,  and  would  have  made  liquidation  easy.     Two 

successive  political  campaigns  re- 
Tlie  sound  money  t    ^     •  ,  r       .^  u     i.      j     j 

controversy  corded  Victory  for  the  gold  standard; 

and  all  future  doubt  as  to  the  ability  of 
the  Government  to  liquidate  its  credit-money  obliga- 
tions, by  payment  according  to  the  standard,  was  set 
at  rest  by  increasing  the  assets  of  the  Government 
available  to  meet  gold  demands.  These  questions 
are  now  considered  settled,  but  a  new  period  of  liqui- 
dation brings  with  it  a  similar  controversy  with  re- 
spect to  the  credit-accounts  of  commercial  banks. 
On  questions  of  public  policy,  opinion  is  again  di- 
vided between  the  same  schools,  representing  the 
same  ideals  that  have  contested  for  supremacy 
throughout  the  last  two  centuries. 

The  Demands  of  the  Two  Schools  of  Banking  Reform 

A  re-statement  of  their  respective  demands  may 
lend  clearness  to  the  presentation  of  contending 
faiths.  To  give  greater  facility  to  the  liquidation  of 
bank-credit  liabilities,  the  one  school  argue:  (i)  for 
authority  to  issue  new  promissory  notes  in  settlement 
Demands  of  the  ^^  credit-accounts  outstanding ;  (2)  for 
"  commercial  as-  a  first  lien  on  the  general  assets  of  the 
sets  ''banking      bank  to  secure  the  ultimate  payment  of 

school  ,  /\ri  iT-ri 

these  notes;  (3)  for  the  abolition  of  the 
Sub-Treasury;  (4)  for  the  "deposit"  of  all  revenues 
of  the  Government  in  the  commercial  banks,  without 


"sound"  and  "elastic"  banking  63 

collateral  security;  (5)  for  the  right  of  banks  to  es- 
tablish branches,  without  requiring  a  proportionate 
increase  of  capital-resources  to  liabilities. 

The  arguments  offered  in  support  of  these  several 
demands  are  in  brief  as  follows:  (i)  That  authority 
to  issue  notes  will  relieve  the  banks  from  the  necessity 
of  obtaining  legal-tender  money  for  delivery  in  time 
Arguments  stip-  ^^  unusual  demand  for  liquidation  of 
porting  these  de-  bank-credit,  and  will  thus  relieve  ex- 
*"^    ^  traordinary  pressure  on   the   money 

market;  (2)  that  a  first  lien  on  the  general  assets  of 
the  bank,  to  secure  the  ultimate  payment  of  notes 
issued  in  settlement  of  outstanding  credit-accounts, 
will  keep  the  bank-note  as  "sound"  as  the  issues  of 
the  Government,  and  will  protect  it  as  well  as  if 
secured  by  a  deposit  of  Government  bonds;  (3)  that , 
the  abolition  of  the  Sub-Treasury  system  will  prevent  I 
money  being  abstracted  from  the  regular  channels  of , 
trade  when  there  is  a  surplus  of  Government  revenue 
over  expenditure ;  (4)  that  by  "depositing"  the  reve- 
nues of  the  Government  with  the  commercial  banks, 
these  "deposits"  may  be  used  to  support  still  larger 
volumes  of  credit-accounts,  and  increase  the  available 
funds  of  the  community;  (5)  that  by  a  system  of 
branch-banking,  capital  will  be  given  greater  "fluid- 
ity," —  i.e.,  the  money  of  the  bank  may  flow  from 
one  part  of  the  country  to  another  as  it  may  be 
needed. 

Answering  these  contentions,  the  other  school  of 


64        THE  BANK  AND  THE  TREASURY 

banking  opinion  urge  that  all  this  is  a  plea  directed 
towards  weakening  the  capital-resources  of  the  banks 
on  the  one  hand,  and  for  permission  to  avoid  payment 
of  credit-accounts  outstanding  on  the  other.  Further 
enlarging  on  these  views,  they  argue  that  authoriza- 
tion to  issue  new  notes  in  settlement  of  demands  for 
Ari'uments  for  delivery  of  money  made  on-account 
"capital  assets''  is  a  means  of  avoiding  payment,  and 
^^  *^^  in  its  effect  not  only  prevents  such  a 

readjustment  of  assets  to  liabilities  as  is  necessary  to 
"sound  banking,"  but  tends  toward  a  still  larger 
inflation  of  credit,  at  the  very  time  when  assets  are 
being  scaled  by  the  exercise  of  more  conservative 
judgments  of  valuation  —  i.e.,  when  ability  to  con- 
vert assets  into  cash  for  delivery  on  credit-demands 
is  being  reduced.  It  is  also  pointed  out  that  the 
security  offered  for  note-issues,  in  the  form  of  a  lien 
on  the  general  assets,  not  only  decreases  the  need  of 
capital-resources,  but  at  the  same  time  tends  to 
weaken  still  further  the  support  to  bank-credit-ac- 
counts —  the  kind  of  funds  in  most  general  use  — 
and  to  weaken  public  confidence  in  the  whole  bank- 
ing system;  the  immediate  effect  of  this  weakened 
confidence  is  to  lessen  the  opportunities  of  the  bank 
to  render  a  service  in  the  community  out  of  which  it 
obtains  its  revenue.  They  urge  that  the  Sub-Treas- 
ury, instead  of  being  an  element  of  weakness,  is  an 
element  of  strength  in  two  ways:  first,  by  segregating 
the  public  funds,  the  necessity  for  larger  bank  capi- 


''sound"  and  "elastic"  banking  65 

talization  is  increased ;  and,  second,  by  storing  up  an 
independent  reserve  in  time  of  low  money-demand, 
an  independent  money-reserve  is  at  hand  which  may 
be  made  available  to  the  banks  in  time  of  monetary 
strain.  In  support  of  this  last  contention,  they  point 
to  the  wholesome  influence  of  the  Sub-Treasury  in 
the  recent  disturbances,  such  as  the  Baltimore  and 
St.  Louis  panics,  at  which  times  the  bank  situation 
might  have  proved  disastrous  to  the  business  of  the 
whole  country,  had  it  not  been  for  the  aid  of  the 
Government. 

As  to  the  so-called  "deposits"  of  Government- 
moneys  in  the  banks,  they  show  that  these  are  noth- 
ing more  or  less  than  loans  to  the  banks  without 
interest.  In  this  relation,  it  is  further  urged  that  the 
only  reason  why  the  Government  or  anyone  else 
should  purchase  a  bank-account  is  to  obtain  funds 
for  current  use  in  a  form  more  convenient  than 
money;  that  the  only  need  of  the  Government  for 
such  funds  is  represented  in  the  accounts  of  disburs- 
ing officers  —  about  $6,000,000.  They  hold,  there- 
fore, that  the  ever-increasing  loans  of  the  Govern- 
ment to  the  banks  (in  the  early  part  of  1904  amount- 
ing to  about  $170,000,000)  put  a  premium  on  their 
Increased  ''elas-  relying  on  the  paternal  support  of  the 
increased  capital  Treasury,  mstead  of  dependmg  on 
strength  their   own   capital-resources   for   the 

cash  needed  in  the  liquidation  of  their  own  accounts 
—  i.e.,  for  money-reserves.     Again,  it  is  urged  that 


66       THE  BANK  AND  THE  TREASURY 

the  demand  for  branch-banking  is  inspired  by  this 
same  motive  —  the  desire  for  still  further  lessening 
the  capital  cost  of  doing  business,  which,  if  accom- 
plished, would  result  in  again  weakening  the  need 
for  capital  contributions  by  the  stockholding  pro- 
prietors of  banking  corporations. 

This  second  school  would  secure  elasticity  in  quite 
another  way.  Their  underlying  principle  is  ex- 
pressed by  Mr.  James  G.  Cannon:  "Bankers  some- 
times plead  for  more  elastic  currency,  but  what  is 
needed  is  more  elasticity  of  the  assets  of  the  bank; 
what  is  wanted  are  assets  that  are  readily  convertible 
into  cash  in  time  of  panic,  which  will  pay  depositors, 
and  at  the  same  time  permit  new  loans."  This 
Adequate  capital-  Statement  sets  out  in  strong  relief  the 
resources  the  so-  irreconcilable  premises  of  the  two 
"^^''^  classes  of  thinkers;  the  one  urging  a 

right  to  increase  liabilities  still  further  when  their 
assets  are  already  inadequate  to  support  outstanding 
demand-credit ;  the  other  urging  an  increase  in  capi- 
tal-assets—  those  assets  readily  convertible  into  cash 
without  curtailing  loans. 


Chapter  VI 

THE  RELATION  OF  BANK  CAPITALIZATION  TO 
THE  PROBLEM  OF  ELASTICITY 

Although  the  relation  of  capitalization  to  the 

problem  of  elasticity  is  an  indirect  one,  its  importance 

has  been  overlooked  by  those  who  have  had  remedies 

to    propose.    As    before    observed,    "elasticity    of 

credit-accounts"  and  of  banking  accommodations  is 

Distinction  be-  the  desideratum;  and  elasticity  of 
tween"  wild-cat"         ■,..  ,       ,  j  , 

and ''sound"       credit-accounts  depends  on  an  ade- 

banking  quate  equipment  of  the  bank  with 

"available"  or  "convertible"  capital-resources.  The 
assets,  which  are  available  without  "forcing"  or 
curtailing  loans,  are  those  that  are  obtained  by  capi- 
tal expenditure ;  in  fact  it  may  be  said  that  this  is  the 
chief  end  for  which  the  capital  of  a  banking  institu- 
tion is  obtained.  The  provision  of  "capital-assets" 
instead  of  "commercial-assets"  as  a  basis  for  bank- 
credit  (whether  in  the  form  of  notes-of-hand  or  bank- 
credit-accounts)  is  the  essential  distinction  between 
the  "wild-cat  banking"  of  the  past  and  "sound 
banking." 

This  is  another  way  of  stating  the  controversy  be- 
tween the  two  schools  of  banking  opinion  represented 

IG7] 


G8        THE  BANK  AND  THE  TREASURY 

by  Mr.  Eckels  and  Mr.  Dawes.  While  it  may  not 
be  said  that  Mr.  Eckels  favors  "wild-cat"  banking 
(i.e., banking  without  capital),  the  conclusion  reached 
by  his  critics  seems  warranted  that  all  of  his  proposals 
are  in  the  direction  of  weakening  the  capital  support 
given  to  asset  liabilities  outstanding.  An  application 
of  his  proposals,  therefore,  would  be  in  the  direction 
of  wild-cat  banking.  Mr.  Eckels  argues  for  bank- 
ing on  "commercial-assets,"  i.e.,  making  the  current 
credit  obligations  of  the  bank  depend  on  the  converti- 
bility of  loans  and  discounts,  which  in  turn  would 
depend  on  the  convertible  assets  of  customers.  The 
Banking  on  the  school  represented  by  Mr.  Dawes 
capital  of  the  contend  that  the  current  money-de- 
^^  mands  arising  out  of  the  credit-ac- 

counts used  by  the  bank  to  purchase  commercial 
paper  should  be  met  by  the  bank  itself  out  of  its  own 
capital;  i.e.,  the  second  school  referred  to  argue  for 
banking  on  the  capital-resources  of  the  bank  instead 
of  banking  on  the  convertible  assets  of  the  community, 
to  which  the  bank  has  sold  its  credit  to  be  used  as 
current  funds. 

Principles  oj  Banking  with  Respect  to 
Capitalization 

The  reasoning  of  this  second  school  is  based  on  the 
assumption  that  the  purpose  of  bank  capitalization, 
as  in  all  business  enterprise,  is  to  provide  funds  with 
which    to    procure    permanent    equipment.      This 


BANK  CAPITALIZATION  AND   ELASTICITY  69 

assumption  cannot  be  denied ;  it  must  be  accepted  as 
axiomatic.  The  financial  process  called  capitalization 
Capitalization  oj  is  the  creation  of  a  permanent  fund 
permanent  needs  for  a  permanent  use.  The  reason  for 
^'   ^^  ^  obtaining  funds  for  permanent  equip- 

ment by  capitalization  is  to  avoid  the  necessity  of 
constantly  refunding — a  need  which  is  a  continuing 
one.  This  being  generally  accepted,  the  only  ques- 
tion that  remains  is:  What  are  the  permanent  needs 
—  what  is  the  equipment  necessary  to  safe  banking  ? 
Their  second  premise  is  that  the  business  of  bank- 
ing is  one  of  furnishing  "current  funds"  to  its  cus- 
tomers in  the  form  of  non-interest-bearing  credit. 
This  must  also  be  accepted.  The  customer  obtains 
these  credit-funds  by  selling  to  the  bank  his  own 
interest-bearing  note,  or  some  other  form  of  bankable 
asset.  The  earnings  of  a  bank  are  derived  from 
exchanging  these  non-interest-bearing  credit  obliga- 
tions, which  are  used  in  the  community  as  current 
Needs  determined  ^^nds,  for  good  commercial  paper 
hy  nature  oj  purchased  at  a  discount  or  with  in- 
husmess  ^^^^^^    accruements.*    The    amount 

of  earnings  depends  in  large  measure  on  the  amount 
of  good  commercial  paper  the  bank  is  able  to  buy 
with  its  credit-accounts  —  i.e.,  profits  depend  on  the 
amount  of  credit-accounts  (so-called  deposits)  pur- 

*This  form  of  statement  is  not  entirely  in  accord  with  the  more  recent 
practice  whereby  the  hanks  are  paying  interest  on  their  own  accounts 
(deposits).  But  in  such  event,  the  rate  must  necessarily  be  lower  than 
that  paid  by  the  customers  for  loans.     In  any  event  the  result  is  the  same. 


70       THE  BANK  AND  THE  TREASURY 

chased  by  customers  by  means  of  their  own  interest- 
bearing  obligations  and  bankable  assets. 

The  permanent  need  of  a  commercial  banking 
institution  is  a  need  for  money  and  for  assets  readily 
convertible  into  money;  this  equipment  is  necessary 
as  a  means  of  supporting  outstanding  credit-accounts 
sold  to  customers.  And  if  a  bank  has  in  mind  the 
principle  of  elasticity  in  providing  accommodation  to 
the  community  which  it  attempts  to  serve,  the  amount 
The  amount  of  ^^  capitalization  of  a  bank  should  be 
capital  needed  by  sufficient  to  support  and  protect  its 
a  bank  credit-purchases  of  all  good  commer- 

cial paper  offered  by  those  who  wish  to  use  credit- 
accounts.  The  bank  holding  itself  ready  at  all  times 
to  purchase  all  good  paper  offered  by  those  who  carry 
so-called  "deposits"  should  have  "capital-resources" 
large  enough  to  meet  all  demands  for  money  on  the 
credit-accounts  created  and  issued  to  customers  in 
exchange  for  commercial  paper,  without  calling  or 
re-discounting  its  loans.  Or,  to  state  the  conclusion 
of  the  second  school  categorically:  Capitalization 
should  be  sufficient  to  meet  every  money-demand  on 
the  amount  0}  banking  (credit-account)  business  done. 

If  there  were  no  variations  in  the  amount  of  credit 

used,  then  a  money  equipment  large 
Fluctuations  in  ■,     ,  .  j  j 

credit-demand      ^"o^S^  ^^  "^^et  money-demands  on 

this  constant  volume  of  credit-issues, 
pending  voluntary  liquidation,  would  be  the  only 
equipment  needed.      But   the   fluctuations  of  de- 


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BANK  CAPITALIZATION  AND  ELASTICITY  71 

mands  for  current  bank-credit  are  continuous ;  the  pro- 
portion of  money-demands  to  credit  outstanding  is 
also  variable.  These  fluctuations  come  from  the 
shifting  prosperity  of  customers ;  they  come  also  from 
the  fluctuating  demands  of  a  business  community 
from  season  to  season. 

It  is  found  by  experience,  however,  that  the  de- 
mand for  current  funds  {i.e.,  the  amount  of  good 
commercial  paper  and  other  bankable  assets  offered 
to  the  bank  in  exchange  for  accounts)  varies  with 
considerable  regularity.  The  money-demand  may 
likewise  be  closely  approximated.  In  highly  mer- 
cantile communities  the  experience  of  a  bank  may 
show  a  recurring  ebb  and  flow  of  credit  four  times  a 
year  —  the  largest  demands  coming  semi-annually ; 
in  certain  agricultural  communities  there  is  a  rise 
Ability  to  capital-  and  fall  twice  per  year;  in  others,  the 
ize  fluctuating  loans  and  accounts  cumulate  and  are 
demands  reduced  by  voluntary  liquidation  only 

once  in  twelve  months.  The  amount  of  capital 
needed  under  such  circumstances,  unless  the  bank 
intends  regularly  to  shift  the  burden  by  re-discount, 
is  an  amount  that  will  provide  a  safe  money-reserve 
for  the  support  of  the  largest  volume  of  credit-ac- 
counts (so-called  deposits)  carried  during  the  year. 

No  greater  fallacy  existed  in  banking  circles  than 
the  one  so  often  stated  —  that  a  certain  percentage 
of  "cash"  to  deposits  is  the  only  equipment  necessary 
to  sound  banking.    This  form  of  reasoning  has  led 


72  THE  BANK  AND   THE  TREASURY 

to  strange  results.  In  time  of  minimum  demand, 
the  money-reserves  are  allowed  to  run  low  in  propor- 
Eqiiipment  ^ion.    By  assuming  that  this  is   the 

needed  to  meet  only  form  of  equipment  needed,  the 
fluctuations  ^^^^  j^^g  ^^  resources  from  which  more 

money  may  be  realized,  when  demands  are  larger, 
without  calling  loans  or  restricting  credit  accommo- 
dations. Again,  in  attempting  to  determine  the 
amount  of  money-reserve  needed,  it  may  be  found 
that  in  one  institution  less  than  ten  per  cent  is  actually 
used.  The  bank  having  such  an  experience  recog- 
nizes that  it  is  not  good  business  to  carry  a  money- 
reserve  of  twenty  or  thirty  per  cent.  This  would  be 
as  foolish  as  for  a  coke  company  to  build  twice  or 
three  times  as  many  ovens  as  it  may  ever  hope  to  use. 
The  clause  of  the  National  Bank  Act  which  allows 
the  banks  to  "deposit"  their  surplus  money-reserve 
is  a  contradiction  in  itself  and  a  recognition  of  this 
folly.  But  those  who  are  responsible  for  this  law 
engaged  in  two  other  fallacies,  viz.:  (i)  that  the  so- 
called  ''deposit"  is  not  a  sale  of  money;  and  (2)  that 
the  asset  obtained  on  sale  of  surplus  money  is  a 
readily  convertible  "in vested-reserve." 
The  wide  variations  of  demands  for  money  from 

"Money-reserve"  ^^^^  ^^  ^'^^^  ^^  ^^e  accounts  of  cus- 
and  "invested-  tomers  make  two  forms  of  equipment 
reserve  advantageous,  viz.:  (i)  a  legal-tender 

"cash-reserve"  of  such  amount  as  will  protect  the 
bank  against  all  current   demands,    including   de- 


BANK  CAPITALIZATION  AND  ELASTICITY  73 

mands  of  customers  for  money  and  demands  of 
banks  on  exchanges;  (2)  an  "invested  capital-re- 
serve" which  will  produce  an  investment  income 
when  money-demands  are  small,  but  which  may 
readily  be  converted  into  ''cash"*  in  time  of  need, 
without  forcing  the  bank  to  sell  its  commercial  paper 
or  call  in  its  loans. 

The  Kind  oj  Capital  Equipment  Necessary  to 
Elasticity 

As  a  basis  for  further  discussion  of  the  relation  of 
capitalization  to  the  problem  of  elasticity,  the  follow- 
ing illustration  is  given.  A  bank  with  a  share-capi- 
tal of  $100,000  and  a  surplus  of  $25,000  may  provide 
equipment  for  itself,  as  follows: 

Capital-Resources 

Banking  house $5,000 

Redemption  equipment: 

1.  Cash-reserves: 

(a)  Exchange  balance $10,000 

{h)  Money-reserve 60,000 

2.  Invested-reserve 50,000     1 20,000 

Total  equipment $125,000 

Ca  pital  Liabilities 

Capital  stock $100,000 

Surplus 25,000 

Total  capitalization $125,000 

*"Cash"  is  here  used  to  mean  legal-tender  "money"  and  "accounts" 
with  banks  for  purposes  of  redeeming  exchanges,  but  not  to  include 
"loans"  to  banks  at  interest  even  when  these  loans  are  in  the  form  of 
open  accounts  not  used  for  the  redemption  of  credit  obligations.  See 
subsequent  treatment  of  "loans  to  reserve  agents,"  etc. 


74        THE  BANK  AND  THE  TREASURY 

With  these  capital-resources  and  with  this  redemp- 
tion equipment  of  $120,000  the  bank  may  purchase 
commercial  paper  and  other  bankable  assets  with  its 
own  credit-accounts  as  follows: 

Commercial  Assets 
Loans  and  discounts,  etc.* $466,666.66 

Commercial  Liabilities 
Accounts  of  customers  (i.e.,  deposits) $466,666.66 

From  the  above  it  will  be  seen  that  the  bank  in 
question  has  used  all  its  capital  in  the  purchase  of 
equipment,  that  is  to  say:  (i)  $5,000  was  used  to 
provide  a  banking-house,  furnishings,  etc.;  (2)  a 
redemption  equipment  made  up  of  a  "cash-reserve" 
of  $70,000  and  an  "in vested-reserve"  of  $50,000  — 
i.e.,  capital-resources  amounting  to  $120,000  were  set 
aside  for  the  protection  of  the  credit  transactions  of 
the  bank  with  its  customers.  In  the  above  showing, 
$466,666.66  of  "demand-accounts"  are  represented 
as  outstanding;  these  have  been  used  to  purchase 
$466,666.66  of  commercial  paper.*  It  thus  appears 
that  there  is  a  "cash-reserve"  amounting  to  fifteen 
per   cent   of   the   outstanding   customers'   accounts 

*It  is  not  to  be  presumed  that  all  accounts  are  created  by  the  purchase 
of  commercial  paper.  Much  of  the  accounts  are  created  by  "deposits" 
(sales)  of  money,  checks,  and  drafts,  etc.,  but  generally  speaking  the 
money,  checks,  and  drafts  deposited  with  (sold  to)  a  bank  will  be  used  as 
set-otts  against  withdrawals,  and  the  customers'  accounts  (deposits)  will 
very  nearly  equal  commercial  paper  held  —  i.e.,  loans  and  discounts. 
If  the  capital  funds  are  kept  separate  and  apart  and  the  investments  to 
be  used  as  capital-equipment  clearly  distinguished  and  unimpaired,  the 
"commercial  assets"  account  and  the  "commercial  liabilities"  account 
will  be  very  nearly  equal. 


BANK  CAPITALIZATION  AND  ELASTICITY  75 

(so-called  ''deposits")  and  that  there  is  an  added 
"  in  vested-reserve  "  of  ten  and  seven-tenths  per  cent. 
Let  us  assume  that  this  bank  is  located  in  a  Western 
cattle  country,  and  that  the  demands  of  customers 
for  current  funds  fluctuate  from  $300,000  to  $700,000 
during  a  year  —  also  that  a  fifteen  per  cent  money- 
reserve  (a  much  larger  money-reserve  than  is  usually 
necessary)  is  found  adequate  at  all  times  to  satisfy 

current  demands  for  money.  During 
Capital  adjust-      .-,  ^.^.^       \  •      •  ii.      i 

ments  to  demands  ^^e  cattle  shippmg  season  the  loans 

v^ould,  by  voluntary  liquidation,  be 
reduced  to  $300,000;  at  such  times  only  $45,000  in 
"cash-reserve"  would  be  needed  for  safety.  With 
the  capitalization  above  represented,  therefore,  $65,- 
000  of  the  redemption  equipment  of  the  bank  might 
be  invested  in  some  kind  of  readily  convertible  asset 
that  would  produce  an  income.  Gradually,  as  the 
season  progressed,  the  ranchers  would  bring  in  new 
cattle-notes  to  exchange  with  the  bank  for  accounts. 
Safety  would  then  demand  an  increase  in  the  ''cash- 
reserve";  this  (the  cash-reserve)  might  then  be  re- 
couped out  of  the  "  in  vested-reserve  " — i.e.,  out  of 
the  unencumbered  capital-resources.  When  the 
commercial-paper-assets  and  current-accounts-pay- 
able rise  to  $700,000  the  "money-reserve"  (by  sale 
or  by  hypothecation  of  "invested-reserves")  would 
be  increased  to  $105,000  (fifteen  per  cent  of  out- 
standing accounts-payable)  and  still  leave  a  ten  per 
cent  margin  of  "  invested-reserve."    That  is,  $45,000 


76        THE  BANK  AND  THE  TREASURY 

of  the  capital-resources  in  the  form  of  "in vested- 
reserves"  might  be  hypothecated  with  a  ten  per  cent 
margin  in  collaterals  without  sale  of  the  invested 
capital-reserves  (or  they  might  be  sold)  in  any  market 
Elasticity  a  result  where  money  might  be  had  on  favor- 
oj  capital  adjust-  able  terms,  and  the  amount  of  the 
ments  money  so  purchased  might  be  trans- 

ferred as  an  exchange  balance  to  the  Western  bank. 
With  such  an  equipment,  the  bank,  doing  business 
under  the  conditions  assumed,  would  enjoy  an  elas- 
ticity in  cash-reserves  equal  to  the  full  capitalization, 
less  amount  invested  in  banking-house  and  fixtures; 
it  would  also  enjoy  an  elasticity  in  customers'  ac- 
counts equal  to  more  than  five  and  one-half  times  its 
total  capital.  This  elasticity  might  be  attained  and 
at  the  same  time  the  bank  might  keep  invested  at 
interest  all  of  its  capital  which  is  not  actually  needed 
as  a  "cash-reserve"  to  meet  current  demands  on 
credit  obligations  outstanding. 


Chapter  VII 

THE  PUBLIC  CONTROL  OF  COMMERCIAL  BANKS 

One  of  the  principal  functions  of  government,  so 
far  as  it  undertakes  to  control  banks,  is  to  protect 
the  customer  against  an  impairment  of  banking 
capital;  to  this  end  periodical  reports  are  required. 
Question  is  raised  as  to  the  efficiency  of  present 
methods  of  control  and  as  to  the  degree  of  pro- 
tection given  to  purchasers  of  credit-accounts  of 
banks.  Preliminary  to  this  inquiry  three  questions 
must  be  answered  before  any  proper  appreciation 
may  be  had  of  the  possibilities  of  public  control  as 
a  means  of  protecting  the  public  against  an  "un- 
sound" and  "inelastic"  circulating  medium,  viz., 
(i)  what  are  the  powers  of  control  given  by  the  Na- 
tional Bank  Act?  (2)  Under  the  Act,  what  are  the 
purposes  for  which  control  is  to  be  exercised?  and 
(3)  in  the  exercise  of  powers  granted,  what  devices  or 
means  may  be  employed  by  the  Comptroller  to  reach 
these  ends  ?  These  preliminary  questions  having  been 
disposed  of  we  then  will  be  fairly  abreast  of  our  topic. 

Powers  oj  Control  Given  by  the  National  Bank  Act 

The  first  of  these  inquiries  may  be  answered  by 
direct  appeal  to  the  language  of  the  Act.     Section 

[77] 


78        THE  BANK  AND  THE  TREASURY 

No.  87  of  the  National  Banking  Law  (Section  521 1, 
R.  S.)  contains  this  specific  mandatory  declaration: 
"Every  association  [i.e.,  National  bank]  shall  make 
to  the  Comptroller  of  the  Currency  not  less  than  five 
reports  during  the  year,  according  to  the  form  which 
may  be  prescribed  by  him."  This  general  provision 
is  supplemented  by  grants  of  specific  power  to  the 
Comptroller,  which  enable  him  to  call  for  other  re- 
ports as  often  as  he  may  desire,  and  to  obtain  such 
information  as  he  ''in  his  own  judgment"  thinks 
necessary  ''to  a  full  and  complete  knowledge"  of 
financial  condition;  a  bank  failing  or  refusing  to 
comply  with  such  request  is  liable  to  a  penalty  of 
$100  per  day  (Section  5213,  R.  S.).  It  would  appear, 
therefore,  that  the  Comptroller  is  not  lacking  in 
authority  to  obtain  any  and  all  information  which 
may  be  necessary  to  administrative  supervision.  A 
further  reading  of  the  National  Bank  Act  quite  as 
concisely  forces  the  conclusion  that  the  Comptroller 
has  all  the  power  necessary  to  a  complete  control  over 
National  banks  and  their  operations,  as  to  all  subjects 
which  are  properly  within  the  range  of  official  dis- 
cretion ;  this  power  extends  even  to  the  taking  posses- 
sion of  the  bank  itself  and  winding  up  its  affairs  for 
failure  to  comply  with  his  demands. 

The  Purposes  jor  which  Control  is  to  be  Exercised 

This  brings  us  to  consider  the  second  question 
raised,  viz.:  the  subjects  of  official  discretion  under 


PUBLIC  CONTROL  OF  COMMERCIAL   BANKS        79 

the  Act,  or  the  purposes  for  which  official  control  is  to 
be  exercised.  It  has  repeatedly  been  affirmed  that 
the  prime  purpose  of  the  National  Bank  Act  was  to 
create  a  better  market  for  Government  bonds  when 
the  National  credit  needed  support.  In  the  midst  of 
civil  strife  when  the  financial  resources  of  the  nation 
were  strained  almost  to  the  point  of  bankruptcy,  it 
was  conceived  that  a  very  large  part  of  the  capital 
employed  in  commercial  banking  enterprise  in  the 
United  States  might  be  utilized  to  support  the  Gov- 
ernment. The  plan  proposed  was  an  old  one  —  one 
in  which  the  banks  (being  induced  to  use  their  capital 
to  purchase  Government  bonds  receiving  the  high 
rate  of  interest  then  paid  on  National  loans)  would 
be  permitted  to  use  "notes"  with  which  to  carry  on 
their  banking  business.  By  this  device  it  was 
thought  that  the  financial  strength  of  the  banks 
might  be  brought  to  the  support  of  the  Government, 
i.e.,  that  the  State  banks  might  be  induced  to  bring 
over  their  capital  into  a  new  National  system  where 
it  might  be  utilized  in  the  manner  indicated. 

To  make  such  a  scheme  acceptable,  however,  two 
conditions  must  be  met:  The  first  result  of  such  a 
plan  of  support  to  the  bond  market  would  be  a  large 
Conditions  neces-  increase  in  the  money  circulation  of 
sary  to  the  adop-  the  country  and  this  note  would  not 
tton  oj  the  Bank  ^^  received  unless  it  be  made  as  sound 
(i.e.,  as  valuable)  as  the  money  then  in  current  use 
—  the  greenback.     But  this  is  not  the  only  condition 


80       THE  BANK  AND  THE  TREASURY 

that  the  Government  must  reckon  with.  In  the 
experience  of  the  past,  business  had  suffered  quite  as 
much  from  unsound  bank-credit  in  the  form  of 
customers'  accounts  (or  deposits)  as  it  had  from  an 
unsound  currency.  National  reaction  against  "wild- 
cat" banking  had  but  recently  forced  the  several 
State  systems  over  to  a  basis  of  capitalization  and 
official  inspection  to  protect  the  people  against 
wholesale  fraud  and  bankruptcy.  If  these  State 
institutions  were  to  be  brought  into  a  National  bank- 
ing system  —  if  the  Government  was  to  utilize  their 
capital-resources  to  fund  its  own  necessities  —  the 
new  National  system  must  carry  with  it  all  the  pro- 
visions for  safety  and  for  the  protection  of  the  public 
against  the  speculative  devices  of  the  unscrupulous 
that  three  decades  of  the  legislative  reaction  had 
evolved.  Wild-cat  banking  was  banking  on  "com- 
mercial assets"  without  adequate  capitalization. 
From  1837  to  the  time  of  the  Civil  War  the  whole 
trend  in  banking  ideals  and  in  banking  legislation 
was  toward  the  strengthening  of  banking  equipment. 
It  had  been  found  from  bitter  experience  that  a  bank 
which  was  not  properly  capitalized  (and  which, 
therefore,  did  not  have  capital-resources  sufficient 
to  support  its  credit  transactions)  was  as  dangerous 
to  those  coming  into  business  contact  with  it  as  was 
a  mine  or  a  factory  whose  construction  was  faulty 
and  whose  machinery  was  overcrowded.  To  the 
public,  the  poorly  equipped  bank  was  much  more 


PUBLIC   CONTROL   OF   COMMERCIAL   BANKS         81 

dangerous  than  the  mine  or  factory  by  reason  of  the 

fact  that,  in  case  of  collapse,  a  much  larger  number 

of  people  were  constantly  within  the  danger  line. 

After  two  years  of  agitation  and  amendment  and 

compromise  an  acceptable  law  was  enacted. 

Under  the  Act  the  note  was  to  be  secured  by  a 

collateral  deposit  of  the  bonds  purchased;  and  those 

Guarantees  jor      holding    the    credit-accounts    of    the 

^^  sound  currency^'  i       i  ..      r  ^     ^    ^    ^ 

and ''sound         ^^^^  were  to  be  protected  by  pro- 

banking''  visions    which    required    what    was 

thought  to  be  adequate  capitalization  before  busi- 
ness should  be  begun,  and  the  exercise  of  official 
supervision  to  prevent  "impairment  of  capital" 
during  the  period  that  business  should  continue. 
It  was  for  the  purpose  of  enforcing  these  two  pro- 
visions of  safety  and  security  that  the  Bureau  of  the 
Currency  was  created  and  a  Comptroller  was  ap- 
pointed. 

Means  by  Which  Control  May  Be  Exercised  and  the 
Ends  of  the  Act  Reached 

The  functions  of  the  Comptroller  have  a  direct 
relation  to  the  conditions  above  described.  The 
first,  or,  as  it  was  then  viewed,  the  prime  purpose  for 

which  public  control  was  to  be  ex- 
The two  purposes         .      ,  ,  .        ,i  i 

of  control  ercised  was  to  guarantee  the  sound- 

ness of  the  new  National  currency. 
This  is  clearly  expressed  in  the  first  clause  of  the 
Bank  Act  which  recites:    ''There  shall  be  in  the 


82        THE  BANK  AND  THE  TREASURY 

Department  of  the  Treasury  a  bureau  charged  with 
the  execution  of  all  the  laws  passed  by  Congress 
relating  to  the  issue  and  regulation  of  a  National  cur- 
rency secured  by  United  States  bonds;  the  chief 
officer  of  which  bureau  shall  be  called  the  Comp- 
troller of  the  Currency.  ..."  The  second  purpose 
of  the  appointment  of  a  Comptroller  is  set  out  in 
various  subsequent  portions  of  the  Bank  Act,  viz.: 
to  insure  adequate  capitalization  —  (i)  adequate 
capitalization  as  a  condition  precedent  to  commenc- 
ing business,  and  (2)  adequate  capitalization  at  all 
times  to  secure  customers  against  loss  through 
"impairment." 

That  the  "National  Currency"  which  was  to  be 
issued  through  the  agency  of  the  banks  might  be  as 
sound  as  the  standard  money  (i.e.,  that  all  forms  of 
money-issues  might  have  a  common  valuation)  pro- 
vision was  made  that  the  bonds  purchased  by  the 
banks  might  be  hypothecated  with  the  Treasurer  as 
collateral  security  for  final  payment  and  redemption 
of  notes  outstanding.  According  to  the  provisions  of 
the  Act  the  Government  was  made  a  trustee  for  the 

benefit  of  note-holders.  For  each 
Control  to  insure  <«,  c       .      j.  ^  ^    ^^      ^       ^ 

sound  currency     ^900  01  notes  turned  over  to  the  bank 

by  the  Government  for  issue,  the 
Treasurer  was  to  hold  a  non-interest-bearing  account 
with  the  bank  secured  by  a  $1,000  bond.  The  obli- 
gation of  the  bank  to  the  Government  was  for  the 
repayment  of  $900   in   bank-notes  or  legal-tender 


PUBLIC  CONTROL  OF  COMMERCIAL  BANKS        83 

money  at  its  own  option.  The  Government  as  trus- 
tee was  the  legal  owner  of  the  bond.  The  benefi- 
ciaries were  (i)  the  note-holders  to  the  amount  of 
notes  held,  and  (2)  the  bank  for  the  amount  of  the 
current  income  on  the  bond  and  for  its  equity  of 
redemption.  This  plan  of  National  currency  having 
been  adopted,  when  a  bank  issued  a  note  the  cus- 
tomer took  it,  as  before  observed,  not  on  the  credit  of 
the  bank,  but  as  a  beneficiary  in  the  trust-security 
held  by  the  Government.  The  note-holder  never 
inquired  as  to  the  credit  of  the  bank  through  which 
the  note  was  issued,  but  relied  entirely  on  his  claim 
against  the  security  held  in  trust  by  the  Treasurer. 
Since  both  bond  and  greenback  were  Government 
credit  the  National  currency  secured  by  Government 
bonds  was  taken  by  the  public  to  be  as  good  as  a 
greenback.  Later,  when  both  greenbacks  and  bonds 
were  redeemed  in  gold,  this  National  currency  came 
to  be  considered  as  good  as  gold. 

As  a  means  of  control  (to  secure  the  soundness  of 
the  circulation  or  National  currency  so  issued), 
therefore,  the  function  of  the  newly  created  bureau 

was  to  see  that  the  trust  account  of 
Unimportance  oj   .-,      ■,       ^       .,1    ^.-l     --n  i       1. 

this  jltnction        the  bank  with  the  Treasurer  was  kept 

amply  secured,  and  that  the  bonds 
held  as  collateral  security  were  sufficient  for  this 
purpose.  But  all  the  data  was  at  hand  for  deter- 
mining this  fact,  and  the  bonds  themselves  being  in 
custody,  the  services  of  the  Comptroller  in  his  capac- 


84        THE  BANK  AND  THE  TREASURY 

ity  as  guardian  of  the  currency  became  merely  nomi- 
nal and  perfunctory.  Moreover,  for  this  service  no 
report  was  necessary  to  control. 

Not  so  with  the  second  function  exercised  by  the 
bureau  —  the  protection  of  those  who  held  open 
accounts  (or  deposits)  of  the  bank;  its  importance 
was  correspondingly  increased,  but  not  in  its  bearing 
Importance  of  ^^  original  capitalization.  As  at  the 
control  to  protect  beginning,  the  method  of  ascertaining 
depositors  whether  the  bank  had  the  requisite 

capital-resources  to  commence  banking  operations 
has  remained  one  of  inspection  and  not  one  of  finan- 
cial report.  The  Comptroller  must  know  that  at 
least  fifty  per  cent  of  the  amount  of  the  authorized 
capital-stock  is  actually  in  hand  in  money,  and  that 
the  balance  of  the  stock  subscription  is  good,  so  that 
it  may  be  realized  in  ten  per  cent  monthly  instal- 
ments. 

The  most  difficult  duty  which  the  Comptroller  has 
to  perform,  and  the  one  of  increasing  importance  to 
the  financial  world,  is  that  which  pertains  to  the 
security  of  the  public  against  the  "impairment  of 
Capital  as  a  Slip-  capital-resources"  during  the  period 
port  to  "de-  that  the  bank  continues  in  operation. 
posits"  Knowledge  as  to  this  feature  of  the 

work  must  come  largely  from  the  reports  made  by 
the  banks  themselves,  as  the  number  of  examiners 
is  grossly  inadequate  to  report  more  than  a  check  on 
some  of  the  main  items  of  account.      It   is  from 


PUBLIC  CONTROL   OF   COMMERCIAL  BANKS         85 

this  duty  that  the  present  inquiry  takes  its  chief 
bearing. 

Protection  oj  the  Public  Against  Impairment  oj 
Capital 

To  state  more  specifically  some  of  the  questions 
that  the  Comptroller  must  have  in  mind  in  asking 
for  reports  with  respect  to  capitalization:  Section 
5202,  R.  S.,  provides  that  "No  association  at  any  time 
shall  be  indebted,  or  in  any  way  liable,  to  an  amount 
exceeding  the  amount  of  its  capital-stock  [capital- 
resources]  at  such  time  actually  paid  in,  and  remain- 
ing undiminished  by  loss  or  otherwise,  except  on 
accounts  of  the  nature  following:  (i)  Notes  of  circu- 
lation ;  (2)  Moneys  deposited  with  or  collected  by  the 
association;  (3)  Bills  of  exchange  or  drafts  drawn 
against  money  actually  on  deposit  to  the  credit  of 
the  association,  or  due  thereto;  (4)  Liabilities  to  the 
stockholders  of  the  association  for  dividends  and 
reserve  profits."  Section  5203,  R.  S.,  specifies  that 
Specific  assign-  ^'^^  association  shall,  cither  directly 
ments  of  duty  to  or  indirectly,  pledge  or  hypothecate 
Comptroller         ^^^  ^^  j^^  ^^^^^  ^^  circulation  for  the 

purpose  of  procuring  money  to  be  paid  in  on  its 
capital-stock,  or  to  be  used  in  its  banking  operations 
or  otherwise;  nor  shall  any  association  use  its  circu- 
lation notes  or  any  part  thereof  in  any  manner  or 
form  to  create  or  increase  its  capital-stock  [capital- 
resources]."     Section   No.    5204   recites  that   "No 


8G        THE  BANK  AND  THE  TREASURY 

association  or  any  member  thereof  shall,  during  the 
period  it  shall  continue  its  banking  operation,  with- 
draw or  permit  to  be  withdrawn,  either  in  the  form 
of  dividends  or  otherwise,  any  portion  of  its  capital 
[capital-resources]."  Again,  in  Section  No.  5205, 
R.  S.,  the  law  requires  that  ''Every  association  which 
shall  have  failed  to  pay  up  its  capital-stock,  as  re- 
quired by  law,  and  every  association  whose  capital- 
stock  [capital-resources]  shall  have  become  impaired 
by  loss  or  otherwise,  shall,  within  three  months  after 
receiving  notice  thereof  from  the  Comptroller  of  the 
Currency,  pay  the  deficiency  in  capital-stock  [capital- 
resources]  by  assessment  upon  the  stockholders  pro 
rata  for  the  amount  of  capital-stock  [capital-liability] 
held  by  each." 

All  of  these,  and  other  assignments  of  duty  with 
respect  to  the  protection  of  customers  against  im- 
pairment of  capital,  make  necessary  official  inquiry 
into  the  relation  of  capital-resources  to  capital-lia- 
bilities —  they  require  a  special  in- 

analytical  report  ^^^^Y  ^^  ^^  ^^^  capital-resources  at 
hand.  For  the  purpose  of  determin- 
ing whether  or  not  the  capital  equipment  of  the  bank 
has  become  impaired  through  "loss"  on  account  of 
banking  operations  or  "otherwise,"  a  keenly  ana- 
lytical report  is  necessary.  To  properly  execute  this 
function  of  control  it  is  necessary  to  distinguish  the 
capital-resources  and  liabilities  from  the  other  assets 
and  obligations  of  business. 


PUBLIC  CONTROL  OF   COAIMERCIAL  BANKS        87 

The  Present  Value  of  the  Report  to  the  Comptroller 
as  a  Means  of  Control 

In  taking  up  the  "form"  of  report  made  by  the 
banks  to  the  Comptroller,  attention  will  be  confined 
to  the  question  of  determining  whether  or  not  the 
No  attempt  made  capital-resources  have  become  im- 
to  distinguish  paired.  An  examination  of  financial 
capital-resources  statements,  as  at  present  made,  will 
disclose  the  fact  that  no  attempt  is  made  to  distin- 
guish "capital "-resources  and  liabilities  from  the 
assets  and  obligations  "current"  to  the  business. 

An  Analysis  of  Banking  Resources 

For  the  purpose  of  determining  the  financial  con- 
dition of  a  going  concern,  it  has  become  an  established 
principle  of  analysis  that  capital-resources  are  all 
those  properties  and  assets  which  are  intended  for 
permanent  or  continuous  use  in  the  business.  Two 
Equipment  to  be  principles  of  administration  are  well 
provided  by  capi-  settled:  (i)  to  prosccute  an  enter- 
tal  investment  ^^-^^^  successfully  it  is  necessary  to 
provide  the  management  with  equipment  adapted  to 
its  purposes;  and  (2)  whatever  property,  equipment 
and  stock  or  working  assets  arc  permanently  or  con- 
stantly needed,  should  be  provided  out  of  capital 
investment.  As  before  suggested,  this  is  the  purpose 
for  which  capital  is  needed.    The  proper  equipment 


88  THE   BANK   AND  THE  TREASURY 

of  a  business  is  necessary  to  success.  As  a  matter 
both  of  financial  advantage  and  of  financial  safety, 
this  equipment  should  be  provided  out  of  capital. 
To  attempt  to  provide  permanent  equipment  out  of 
temporary  loans,  or  floating  debt,  is  to  hold  the  enter- 
prise in  constant  jeopardy.  This  is  as  true  of  a  bank 
as  it  is  of  a  railroad  or  of  a  mine,  and  this  is  the  under- 
lying thought  of  the  law. 

Again,  to  restate  a  currently  accepted  definition, 
the  current  assets  of  an  enterprise  are  those  which  are 
acquired,  not  for  equipment  or  continuous  use  in  the 
business,  but  those  which  are  acquired  in  its  current 
transactions  —  i.e.,  in  the  course  of  current  operation 
for  profit.  The  purpose  of  current  assets  is  realiza- 
tion, or  conversion.  Current  liabilities  are  those  in- 
curred in  current  transactions.  It  is  to  fund  the 
temporary  needs  —  to  meet  the  current  expenses  — 
to  provide  funds  to  carry  these  current  assets  and 
current  transactions  —  that  a  floating  debt  is  con- 
The'' commercial  tracted.  If  the  principles  of  financial 
assets" obtained  analysis  commonly  employed  in  ac- 
oncurrentaccount  counting  are  applied  to  the  assets  and 
liabilities  of  National  banks,  conclusion  may  be 
reached  as  to  whether  or  not  the  capital-resources 
have  been  impaired;  also,  whether  or  not  the 
permanent  equipment  is  adequate  to  support  its 
operations  with  safety  to  those  who  may  be  in 
business  contact  with  the  institutions  under  ex- 
amination. 


PUBLIC   CONTROL   OF   COMMERCIAL   BANKS         80 

What  Are  the  Capital-Resources  oj  National  Banks 

The  reports,  as  at  present  made  to  the  Comptroller, 
are  not  based  on  such  a  system  of  analysis,  and, 
therefore,  any  attempt  at  rearrangement  to  this  end 
must  in  a  measure  be  unreliable.  But  taking  the 
various  items  of  resource  exhibited  as  a  basis  for 
present  discussion,  a  fair  approximation  may  be 
reached:  (i)  ''Banking-house  and  fixtures"  are  un- 
questionably capital-resources.  (2)  "Real-estate," 
in  contemplation  of  law  and  from  every  point  of 
business  reasoning,  should  be  charged  against  capital. 

(3)  The  bank  invests  its  capital  in 
Analysis  0)  ca pi-  1       j     ,  •       i   i.*  j 

tal  outlay  bonds  to  secure  circulation,  and  re- 

ceives on  the  collaterals  deposited 
notes  which  may  be  used  in  the  business  —  the  "mar- 
gin" of  capital  invested  in  these  collaterals  should 
be  considered  a  capital  charge;  the  same  is  true  of 
the  "margins"  invested  in  the  collaterals  deposited 
to  secure  Government  deposits.  (4)  The  "money- 
reserve"  is  essentially  a  capital-reserve;  it  is  the 
principal  redemption  equipment  necessary  to  support 
the  current  credit-accounts  (deposits)  outstanding  — 
the  resource  necessary  to  meet  the  floating  debt  of  a 
business,  whose  chief  transactions  arc  the  purchase 
of  current  assets  by  use  of  its  own  current  credit- 
accounts.  There  can  be  no  doubt  that  the  "money- 
reserve"  held  by  a  bank  should  be  a  direct  charge 
against  capitalization,  and  is  made  so  by  legal  enact- 


90       THE  BANK  AND  THE  TREASURY 

ment  —  the  only  question  with  reference  to  this  class 
of  items  pertains  to  the  interpretation  to  be  given  as 
to  what  properly  constitutes  "money-reserves." 
(5)  The  accounts  which  it  is  necessary  for  a  bank  to 
maintain  to  provide  for  its  out-of-town  "exchanges" 
are  likewise  assets  permanently  needed  and  in  con- 
tinuous use ;  it  should  therefore  be  counted  as  a  part 
of  the  necessary  redemption  equipment.  (6)  Finally, 
the  unencumbered  securities  and  other  direct  invest- 
ments of  capital  owned  and  held  by  a  bank  as  a 
means  of  strengthening  its  cash-reserve  should  be 
regarded  a  part  of  its  redemption  equipment  and 
a  charge  against  capital-resource.  These  must  be 
so  considered  for  the  reason  that  the  direct  applica- 
tion of  capital  to  the  purchase  of  "securities,"  or  for 
that  matter  even  to  the  purchase  of  commercial  paper, 
is  not  banking.  There  can  be  one  purpose  only  for 
making  such  purchases,  viz.:  to  keep  the  capital 
which  is  needed  to  support  credit  transactions  in- 
vested in  income-producing  assets  when  not  needed 
in  the  form  of  "cash."  "Securities"  must  be  con- 
sidered either  as  redemption  cc^uipment  held  in 
reserve  or  as  an  investment  which  is  a  charge  on 
capital  and  therefore  a  deduction  from  capitalization 
for  banking.  The  same  is  true  of  all  other  direct 
investments  of  capital.  A  bank  which  engages  in 
buying  and  selling  "securities,"  in  "underwriting 
flotation,"  or  in  other  business  not  in  the  nature  of 
banking,  needs  to  have  a  larger  capital  than  an  insti- 


PUBLIC  CONTROL   OF   COMMERCIAL  BANKS        91 

tution  which  does  not  so  engage  itself.  Whether  the 
capital  investment  be  in  banking  equipment,  or  in 
other  assets  and  business  ventures,  the  amount  of 
funds  thus  engaged  by  the  banks  should  be  set  up  as 
capital-resources  or  charges  against  the  capital  pro- 
vided for  doing  business,  the  protection  of  which  is 
the  chief  end  of  control. 

These  several  classes  of  assets  being  in  the  nature 
of  charges  against  capital,  the  duty  of  the  Comptroller 
(under  the  National  Bank  Act)  requires  :  (i)  that  an 
examination  of  the  assets  be  made  to  ascertain  what 
may  fairly  be  counted  as  capital  outlay  for  banking 
Examination  to  equipment,  and  that  this  be  compared 
ascertain  capital  with  the  amount  of  capital  provided 
impairment  ^^^  ^^^  ^^  ^^^^  institution  under  exam- 

ination ;  and  (2)  that  an  examination  of  current  assets 
be  made  to  ascertain  whether  there  have  been  any 
losses  suffered  in  the  prosecution  of  the  business,  since 
all  ''bad  loans," etc.,  must  be  charged  against  capital. 

The  accounts  exhibiting  capital  put  into  the  busi- 
ness are  found  on  the  liability  side  of  the  balance- 
Accounts  exhibit-  sheet.  The  capital  provided  for  use 
ing  capital  pro-  in  the  business  is  represented  in  three 
^'^  ^  controlling  accounts,  viz.:  "Capital- 

stock,"  "surplus,"  and  "undivided  profits."  Of 
these,  the  first  two  items  arc  to  be  a  permanent 
reserve  or  liability  in  the  business,  and  the  third 
must  remain  in  it  so  long  as  there  is  any  question  as 
to  the  impairment  of  capital-resources. 


92  THE   BANK  AND   THE   TREASURY 

Before  any  comparison  may  be  made  for  the  pur- 
pose of  determining  what  character  of  investments 
have  been  made  of  capital  put  into  the  business,  the 
statement  of  assets  reported  by  the  banks  must  be 
Provisions  made  assumed  to  be  based  on  a  proper 
jor  appraisement  valuation,  or  a  critical  examination 
oj  assets  must  be  had.     For  this  purpose  the 

Comptroller  may  supplement  the  report  made  by  the 
bank  itself  with  the  report  of  his  examiners  in  whose 
field  the  bank  lies,  or  may  detail  a  special  examiner 
if  the  case  seems  to  warrant  such  an  assignment.  In 
any  case,  however,  a  distinction  must  be  made  be- 
tween the  current-accounts  and  the  capital-accounts. 

Classification  of  Balance-Sheet  to  Show 
Financial  Condition 

Intelligent  judgment  as  to  the  character  of  equip- 
ment provided  by  a  bank  by  capital  investment 
requires  a  classification  of  resources.  The  exercise 
of  ofhcial  discretion  with  reference  to  the  integrity  of 
capital-resources,  which  proceeds  from  the  examina- 
tion of  financial  reports,  makes  a  classified  balance- 
Consolidated  sheet  a  necessity.  To  the  end  of 
statement  jor  establishing  a  basis  for  the  further  dis- 
State  0}  Iowa  ^ussion  of  ^'the  financial  report  as  a 
means  of  control,"  and  at  the  same  time  of  showing 
some  of  the  difficulties  which  stand  in  the  way  of  the 
exercise  of  effective  control  under  the  present  form 
of  report,  an  analysis  of  the  consolidated  statement 


PUBLIC  CONTROL  OF  COMMERCIAL  BANKS        93 

of  all  the  National  banks  of  the  State  of  Iowa  for 
September  9,  1903,  is  here  exhibited.  The  classifi- 
cation submitted  is  not  offered  as  a  model  in  the 
arrangement  of  items.  Neither  is  the  assignment  of 
inadequacy  of  the  present  set  form  intended  to  reflect 
on  Comptrollers  past  or  present.  The  form  now 
used  is,  in  effect,  that  which  has  been  employed  by 
officers  of  banks  for  a  century;  it  has  been  engaged 
by  comptrolling  officers  of  Government  since  public 
examination  first  began.  To  suggest  that  a  change 
might  be  made  to  advantage  is  not  therefore  to  be 
considered  as  offered  in  the  spirit  of  reflection  on 
official  conduct,  more  than  a  proposed  amendment 
of  law  would  imply  legislative  incapacity. 

Not  engaging  any  spirit  of  personal  criticism,  and 
holding  in  mind  the  difficulty  of  doing  more  than  to 
suggest  that  a  classified  balance-sheet  is  essential  to  a 
consideration  of  the  topic  assigned,  the  statement 
of  capital-accounts  opposite  page  94  is  modestly 
offered  as  a  tentative  arrangement. 

Attempting  to  show  the  amount  of  capital  put  into 
the  business,  and  to  account  for  its  investment,  in  the 
exhibit  below  it  is  assumed  that  the  valuation  of 
assets  represented  in  the  reports  of  the  Comptroller 
is  conservatively  made,  and  that  there  are  no  "bad 
loans"  to  be  written  off.  But  even  with  this  assump- 
tion, and  for  this  purpose,  the  form  of  report  made 
by  the  banks  to  the  Comptroller  renders  many  of  the 
items  doubtful:  (i)  In  the  statement  of  "premium  on 


94       THE  BANK  AND  THE  TREASURY 

bonds"  as  one  element  in  the  computation  of  the 
amount  of  capital  locked  up  in  "margins"  there  is 
Doubtjul  items  ^o  way  of  distinguishing  this  from 
due  to  form  of  premium  on  "bonds  on  hand";  (2) 
statement  -^^  ^-^e  "cash  items"  it  is  of  frequent 

occurrence  for  banks  to  include  expense  vouchers 
which  are  to  be  held  till  the  end  of  the  month;  in 
so  far  as  these  were  included,  the  statement  of  the 
amount  of  "cash-reserve"  is  too  large.  (3)  The 
amount  stated  as  "balance  kept  with  banks  for  ex- 
change" must  be  roughly  approximated,  as  no  spe- 
cific inquiry  is  made  in  the  present  form  submitted 
by  the  Comptroller  to  determine  this  fact.  The 
amount  of  Clearing-House  exchanges  held  are  $141,- 
000;  assuming  that  the  amount  of  exchanges  out- 
standing against  the  banks  under  consideration  aver- 
ages$i 75,000,  and  further  that  the  average  exchanges 
against  "outside"  banks  are  not  greater  than  those 
against  clearing-house  banks,  and  this  would  seem 
conservative;  assuming  further  that  on  an  average 
it  requires  three  days  for  outside  exchanges  to  be 
presented  and  paid,  the  average  balance  needed  to 
be  kept  for  the  redemption  of  exchanges  would  be 
$525,000.  Again  assuming  that  the  "outside" 
money  demands  for  exchange  were  not  more  than 
one-tenth  of  the  local  demands  for  money,  and  taking 
this  as  a  basis  for  estimate,  the  exchange  account 
necessary  would  be  $548,799;  this  is  taken  as  the 
amount  of  the  account  with  "reserve  agents"  which 


# 


:  STATE  (IOWA).  SEPTEMBER  ».  igoj,  COMPARED  WITH  CAPITAL  F 


Capital  InvestmeDts  and  Equipment 


Capital  FuDds  in  Business 


PUBLIC  CONTROL  OF  COMMERCIAL  BANKS        95 

is  carried  for  redemption  of  outside  exchanges.  The 
remainder  of  the  "reserve  agent"  account  is  con- 
sidered as  'Moans"  to  other  banks  at  interest  and  is 
included  in  the  "in vested-reserve."  These  amounts 
are  arbitrarily  set  up,  but  as  they  are  both  in  the 
nature  of  capital  charges  the  arbitrary  division  is  not 
important.  (4)  Under  the  head  of  "encumbrances" 
on  "securities  owned"  it  is  assumed  that  the  "bills 
payable"  and  "other  liabilities"  stand  as  encum- 
brances on  stocks,  bonds,  etc.  This  is  true  to  the 
extent  only  that  these  liabilities  are  based  on  stocks 
and  bonds  hypothecated  as  collaterals,  and  in  so  far 
as  this  is  not  true  the  account  would  be  varied  by 
an  exact  return  such  as  might  be  obtained  from  the 
bank.  (5)  The  amount  exhibited  as  "loans  to  re- 
serve agents"  is  stated  on  the  assumption  that  the 
purpose  of  such  investment  is  to  have  a  quickly 
convertible  asset  by  means  of  which  cash  may  be 
obtained  when  the  money-reserve  runs  low  —  a  bank 
making  a  statement  to  the  Comptroller  under  a  form 
calling  for  these  specific  items  of  capital-resource 
might  set  up  some  other  form  of  asset  as  a  "direct 
capital  investment."  In  each  and  all  of  the  items 
above  mentioned  there  are  elements  of  doubt  — 
elements  which  require  questions  to  be  raised,  but 
each  of  which  might  be  made  certain  by  a  different 
form  of  inquiry  submitted  to  the  banks  by  the  Comp- 
troller in  seeking  for  a  classified  statement  of  capital 
investments. 


96        THE  BANK  AND  THE  TREASURY 

But  assuming  for  the  purposes  of  present  discus- 
sion that  the  above  analysis  of  capital  investment 
were  true  to  the  facts,  let  us  see  what  use  might  be 
made  of  such  form  of  report.  In  the  first  place  we 
may  seek  to  eliminate  those  investments  which  are 
not  in  the  nature  of  redemption  or  banking  equip- 
ment. The  building  in  which  the  bank  is  housed 
need  not  be  owned  by  the  bank  itself.  The  banking 
business  is  a  credit  business;  primarily  it  consists  of 
the  exchange  of  bank-credit  for  commercial-credit 
at  a  profit.  Investment  in  a  building  does  not 
strengthen  the  concern  in  its  current-credit  relations. 
Many  of  the  largest  banking  institutions  do  not  own 
a  building.  The  prime  purpose  of  capitalization 
being  to  provide  equipment  with  which  to  supply 

funds  to  the  community  in  the  form 
Unnecessary  c    ,  i         j-.  r  -i.  i 

capital  outlays      ^f  demand-credit,  any  use  of  capital 

to  purchase  a  building  must  be  con- 
sidered as  an  extraneous  investment  not  available 
for  the  support  of  the  credit  of  a  going  concern. 
"Real-estate"  belongs  to  the  same  class  of  invest- 
ments. This  has  been  so  often  said  that  it  has  be- 
come axiomatic  in  commercial  banking  circles.  The 
"margin"  invested  in  the  securities  hypothecated 
with  the  Government  are  also  not  available  to  the 
business  as  a  going  concern.  All  of  the  above 
classes  of  assets  are  important  as  assets  for  final 
liquidation  on  "winding  up,"  but  to  a  "going  con- 
cern" they  are  purely  voluntary  and  ornamental  and 


PUBLIC  CONTROL   OF   COMMERCIAL   BANKS        97 

bear  much  the  same  relation  to  the  business  of  bank- 
ing that  the  gilded  dome  on  the  Congressional  Li- 
brary does  to  the  value  of  its  literary  stores  within. 
Whether  or  not  in  contemplation  of  law  this  amounts 
to  an  impairment  of  capital,  the  fact  remains  that 
$3,297,053  of  capital  invested  in  this  way  has  weak- 
ened the  banks  of  Iowa  as  "going  concerns"  to  that 
extent. 

Another  class  of  considerations  attaches  to  the 
remaining  classes  of  capital  investments  — -  those  re- 
sources used  to  support  the  banking  transactions 
themselves  by  redemption  of  credit  obligations  on 
demand.  Assuming  that  the  banks  had  made  re- 
turn of  redemption  equipment  as  above  exhibited, 
the  Comptroller  as  an  agent  of  the  Government 
Outlays  jor  re-  should  know  whether  this  equipment 
demption  equip-  is  adapted  to  the  use  for  which  it  is 
^"^^  intended.     The  unencumbered  secu- 

rities, for  example,  being  intended  for  an  invested- 
reserve  to  strengthen  the  cash-reserve  held  to  support 
demand-accounts  (deposits  outstanding),  the  ques- 
tion pertinent  to  this  use  is:  Are  these  securities  im- 
mediately convertible  by  sale  or  hypothecation  with- 
out loss  of  principal  ?  If,  again,  any  of  these  are  hekl 
as  the  result  of  underwriting,  this  fact  would  suggest 
that  a  portion  of  the  bank's  capital  was  being  em- 
ployed in  business  other  than  banking  and  there 
would  be  an  impairment  in  use  if  not  in  valuation. 
Such  part  of  the  bank's  capital  as  is  used  for  under- 


98       THE  BANK  AND  THE  TREASURY 

writing  should  be  placed  among  the  unavailable 
assets.  Further  than  the  specific  inquiries  made  as 
to  the  character  of  redemption  equipment,  compari- 
son may  be  made  of  total  capital  outlay  with  capital 
liabilities,  to  ascertain  whether  the  equipment  had 
been  provided  by  means  of  capital  or  on  floating 
debt.  By  some  such  classification  increased  facility 
would  be  given  to  many  other  official  inquiries 
directed  toward  the  protection  of  the  people  against 
the  impairment  of  the  capital-resources  needed  by 
a  going  banking  concern. 


Chapter  VIII 

A   POINT   OF    CONTROL   NOT   ADEQUATELY  COVERED 
BY   THE   NATIONAL   BANK  ACT 

While  the  National  Bank  Act  is  very  specific  as 
to  powers  of  control  directed  against  the  ''impair- 
ment of  capital"  there  is  another  element  of  banking 
strength  or  weakness  quite  as  important  that  has 
been  neglected;  viz.,  the  protection  of  the  customer 
against  overburdening  the  equipment  used.  Judg- 
ment as  to  safety  must  be  made  not  alone  with  re- 
spect to  the  absolute  strength  of  material  used  in 
construction  and  equipment,  but  this  having  been 
Need  for  deter-  determined  it  then  must  be  compared 
mining  the  with  the  weight  or  strain  that  it  is  to 

credit  load  support.    To  be  more  concrete,  every 

facility  is  given  to  such  inquiry  as  the  Comptroller 
may  desire  to  make  to  protect  the  capital  put  into 
the  business  against  deterioration,  but  almost  no 
provision  is  made  for  official  inquiry  as  to  whether 
the  credit  burden  imposed  by  the  bank  officers  on 
this  equipment  in  the  prosecution  of  the  business  is 
greater  than  it  can  safely  bear. 

[99] 


100  THE   BANK   AND   THE    TREASURY 

There  is  no  provision  made  for  correlation  of  capi- 
tal equipment  with  the  credit  liabilities  incurred  in 
the  course  of  its  business.  These  must  be  met  on 
demand,  and  safety  requires  that  they  should  be  met 
by  capitalization.  This  is  an  essential  to  sound 
banking  as  contemplated  in  the  National  Bank  Act. 
Banking  activities  are  represented  in  its  current 
assets  acquired  and  the  current  liabilities  incurred 
in  banking  operation.  To  concretely  exhibit  this 
class  of  financial  results,  reference  will  again  be 
made  to  the  summary  for  the  State  of  Iowa  above 
used  in  the  statement  of  capital  accounts. 

Current  Assets  (Less  $000,00)  —  Acqiiired  in  the  Course  oj 
Banking  Operations 

I.  —  Due  from  Banks  and  Bankers: 

(i)  Due  from  National  Banks  $2,698,877 

(2)  Due  from  State  Banks 1,058,726 

(3)  Clearing-House  exchanges  141,352 

$3,898,955 

IT.  —  Commercial  assets : 

(i)  Loans  and  discount $62,159,426 

(2)  Overdrafts 1,121,025 

Total $63,280,451 

Less  notes  rediscounted. .  105,267 

Net  commercial  assets 63,175,184 

III.  —  Miscellaneous: 

(i)  Revenue  stamps 1,020 

Total  current  assets $67,075,159 


A  POINT  NOT  COVERED  BY  THE  BANK  ACT      101 

Accounts  Representing  Banking  Operations 

Current  Liabilities  {Less  $000,00) —  Incurred  in  Banking 
Operations 

I.  —  Due  to  Banks  and  Bankers : 

(i)  Due  to  National  Banks..     $2,362,481 

(2)  Due  to  State  Banks 4,257,426 

(3)  Due  to  Trust  Companies, 

etc 3,258,966 

$9,878,873 
Less  amount  incurred  for 

equipment  purposes..       1,465,537 

8,413,336 

II. — Commercial  Credit  Accounts: 

(i)  Individual  deposits $58,606,777 

(2)  Deposits  of  U.  S.  disburs- 
ing officers 42,586 

58,649.363 

III. — Miscellaneous : 

(i)  Dividends  unpaid 12,460 

Total  current  liabilities $67,075,159 

From  the  two  summaries  exhibited, — the  one  of 
"capital  accounts"  (p. 94),  and  the  other  of  "banking 
transactions"  (above), — it  appears  that  by  means  of  a 
capital  investment  of  $20,501,114  a  banking  business 
of  $67,075,159  was  carried  on.  With  these  results  in 
mind  let  us  determine,  in  so  far  as  we  may,  what 
Means  oj  deter-  strain  was  brought  on  capital  equip- 
mining  equip-  ment.  In  the  first  place,  on  what 
ment  strength  ^^^^  ^^  ^^^  equipment  does  the  bank- 
ing strain  come?  As  before  observed,  it  is  at  once 
apparent  that  no  part  of  the  credit  strain  falls 
on  the    first    three   classes   of    equipment    enumer 


102  THE  BANK  AND   THE   TREASURY 

ated,  viz.:  (i)  "Banking-house  and  fixtures."  (2) 
"Real-estate"  and  (3)  "Margins."  From  the  point 
of  view  of  the  demands  of  commercial  banking  these 
are  purely  a  gratuitous  use  of  capital.  Ownership 
of  a  house  and  furnishing  is  unnecessary  —  this  para- 
phernalia may  be  leased  and  the  rent  charged  to 
current  expenses,  and  when  a  building  is  owned  it  is 
in  the  nature  of  a  real-estate  investment;  "real- 
estate"  owned  is  an  encumbrance  on  banking  capital 
and  not  banking  equipment;  the  "margms"  invested 
in  bonds  used  as  collaterals  for  notes  and  deposits  are 
incidental  to  the  system  devised  by  the  Government 
to  strengthen  its  own  credit,  and  as  such  are  not 
banking  equipment  —  they  are  a  further  encum- 
brance on  banking  capital. 

The  equipment  necessary  to  banking  transactions 
is  the  "cash-reserves"  or  "such  invested  capital- 
reserves  as  may  readily  be  converted  into  cash"  and 
which  may  be  used  to  meet  demands  on  outstanding 
credit-accounts  without  curtailing  commercial  ac- 
commodation. As  a  means  of  carrying  on  a  business 
which  consists  in  the  exchange  of  bank  "credit-ac- 
counts" for  "income-producing  assets  in  the  nature 
of  commercial-credit,"  the  bank  must  estabhsh  and 
Three  classes  0}    niaintain  a  reputation  for  meeting  its 

redemption  credit-accounts     on     demand.     The 

equipment  ^^j^  ^^^  ^^^^  ^j^j^  ^^^  ^^  ^^^^  ^j^j^ 

safety  to  its  customers  is  by  having  capital-resources 
in  the  form  of  "cash"   when  demands  are  made. 


A  POINT  NOT  COVERED  BY  THE  BANK  ACT      103 

The  real  test  of  banking  strength,  therefore,  is  to  be 
found  in  the  redemption  equipment:  (i)  in  the 
"cash-reserve"  —  cash  in  hand  and  exchange-bal- 
ances —  and  in  ' '  invested-reserve  "  —  "  unencum- 
bered securities"  and  "other  capital  investments" 
readily  convertible  into  cash.  Again  assuming  the 
valuation  of  these  capital-assets  to  be  conservative, 
the  strength  of  banking  equipment  of  the  State  of 
Iowa  by  this  method  of  analysis,  at  the  time  stated, 
was  $17,104,061. 

But  a  comparison  of  strength  of  equipment  with 
the  credit  strain  upon  it  must  be  arrived  at  by  bring- 
ing the  two  results  together.  The  total  demand 
obligations  for  the  payment  of  money  were  in  round 
numbers  $68,500,000.  That  is,  the  redemption 
equipment  (after  deducting  reserve  loans  uncapital- 
ized)  being  $17,100,000,  and  the  total  amount  of 
demand -credit    to    be    supported    $68,500,000,    the 

inverted  pyramid  would  be  $68,500,- 
T he  test  of  credit  ak  r,    .     • 

tension  000  —  $17,100,000.     But    m    gettmg 

at  the  amount  of  the  strain  that  will 

fall  on  the  capital-resources  this  gross  amount  must 

be    reduced.     Eliminating    by    set-off    the    current 

institutional   assets  and  liabilities,   the  relation   of 

credit  outstanding  to  capital-assets  would  be  $62,- 

500,000  —  $17,100,000.     In  other  words,  $17,100,- 

000  invested  in  banking  or  redemption  equipment 

has  permitted  the  banks  of  Iowa  to  purchase  about 

$62,500,000  of  interest-bearing  commercial  assets  by 


104  THE   BANK   AND   THE   TREASURY 

means  of  about  $62,500,000  of  their  own  credit- 
accounts  supported  by  this  equipment.  Through 
banking  operation,  the  corporations  have  a  gross 
income  about  four  times  as  large  as  they  would  have 
by  direct  investment  of  their  capital  in  commercial 
paper,  and  have  furnished  to  the  community  credit- 
funds  which  do  the  work  of  money  of  equal  amount. 

The  purpose  of  control  is  to  make  such  a  business 
safe,  and  the  differential  of  safety  must  be  drawn 
from  experience,  leaving  an  adequate  margin  of  pro- 
tection to  the  public  against  contraction  of  the  circu- 
Need  for  control  luting  medium  as  well  as  to  protect 
as  a  means  0}  customers  against  immediate  loss  from 
^'^'^^  non-payment.     The  need  for  a  better 

correlation  of  capitalization  with  equipment  and 
banking  operations  carried  on  may  appear  the  more 
vividly  by  comparison  of  the  several  classes  of  banks 
reported.     {See  next  page.) 

Assuming  that  for  the  purpose  of  accounting  for 
capital  investment  in  redemption  equipment  the 
cash  on  hand  is  to  be  a  first  charge  against  capital 
(this  not  being  an  income-producing  asset  and  of 
first  importance  in  the  support  of  credit),  in  so  far  as 
may  be  determined  from  published  bank  returns, 
the  foregoing  summary  shows  the  disposition  of  cap- 
ital invested  in  the  banking  business  in  the  various 
classes  of  banks  represented.  From  this  it  would 
appear  that  while  in  a  single  agricultural  State  like 
Iowa  the  banks  by  their  own   capitalization  have 


A  POINT  NOT  COVERED  BY  THE  BANK  ACT      105 


Exhibit  of  Capital  Investments  by  Classes  oj  National  Banks, 

September  g,  1903 

(Stated  in  Millions  of  Dollars.) 


Classes  of  Iteus 


Unavailable  Capital  : 

Investments  (Banking-Houses,  real- 
estate  and  margins) 

Redemption  Equipment: 
Cash -Reserve : 

(i)  Money 

(2)  Exchange  account 

Invested  Reserve: 

(i)  Securities 

(2)  Other  reserve  investments 

Total  Capitalization* 


All 

National 

Banks 


$186 


605 
61 


446 
12 


|)i,3io 


-O'S 

O  > 


03 


$101 


183 


237 
159 


i-a 


147 
14 

116 


UU" 


$43 


248 


t'291 


o  ^ 


$38 


177 


*The  amount  stated  as  capitalization  includes  capital  stock,  surplus,  and  undivided 
profits. 

provided  the  funds  to  procure  a  large  part  of  the 
resources  used  as  redemption  equipment  to  support 
their  outstanding  credit,  taking  all  of  the  banks  of  the 
Inadequacy  of  United  States  this  is  not  true;  they 
capital  invest-  have  provided  capital  enough  for 
^^^  "cash-reserves"  and  for  "securities" 

actually  held,  but  they  have  provided  almost  no 
capital  for  direct  investment  in  "lonns  to  reserve 
agents."  The  banks  in  reserve  cities  (of  the 
second  class)  are  in  about  the  same  relative  con- 
dition as  those  of  the  country  at  large,  in  so  far  as 


lOG  THE  BANK  AND   THE  TREASURY 

these  items  are  concerned ;  absolutely  they  are  in  a 
much  weaker  position  on  account  of  the  importance 
of  their  "reserve  loans"  not  capitalized.  The  banks 
of  the  central  reserve  cities  (the  ''cities  of  the  first 
class"),  however,  have  not  sufficient  capital  to  pro- 
vide themselves  with  the  current  "cash-reserves" 
used  in  the  business,  and  which  are  required  of  them 
by  statute,  to  say  nothing  of  securities  owned;  the 
amount  of  "cash"  which  such  banks  are  able  to 
provide  through  capitalization  is  only  24.2  per  cent  of 
their  net  banking  liabilities.  Assuming  that  all 
of  their  capital  were  retained  in  the  form  of  cash, 
there  would  not  be  enough  to  provide  the  amount 
actually  on  hand  by  $27,000,000  —  this  part  of  the 
redemption  equipment,  together  with  the  funds  neces- 
sary to  provide  all  other  forms  of  equipment  carried, 
had  been  borrowed.  Assuming  that  the  equipment 
actually  carried  is  needed,  then  the  banks  of  reserve 
cities  have  obtained  $292,000,000  of  their  equipment 
on  floating  debt. 

If  we  take  the  judgment  of  bankers  as  to  what 
equipment  is  necessary  to  the  safe  conduct  of  their 
business,  an  interesting  result  will  be  obtained.  For 
this  purpose  it  may  be  assumed  that  a  banker  will 
keep  no  more  "cash"  on  hand  than  safety  to  his 
business  requires;  if  he  does  he  is  violating  good  busi- 
ness judgment.  The  same  may  be  said  of  "exchange 
accounts"  and  of  investments  made  in  low  income- 
producing  assets  from  which  "cash"  may  be  realized 


A  POINT  NOT  COVERED  BY  THE  BANK  ACT      107 

by  quick  returns  to  support  credit-accounts.  Assum- 
ing further  that  the  principle  is  a  sound  one,  that  such 
Capital  weakness  assets  as  are  permanently  employed, 
admitted  hy  or  such  as   are  continuously  needed 

bankers  -^^  ^j^^  business,  should  be  procured 

by  direct  investment  of  capital  {i.e.,  that  a  busi- 
ness concern,  especially  a  bank,  should  not  obtain 
its  equipment  on  a  "floating  debt"),  then  the  in- 
adequacy of  capital  increases  as  we  proceed  from 
periphery  of  the  National  banking  system  towards 
this  centre.  To  exhibit  this  in  tabular  form,  the 
result  of  failure  of  the  Law  to  require  such  control 
as  will  prevent  the  overtaxing  of  capital-resources, 
and  such  as  will  insure  that  our  commercial  banks 
do  business  on  their  own  capital,  would  appear 
something  as  follows:     {See  next  page.) 

In  this  question  is  raised  as  to  several  classes  of 
items.  Without  specific  inquiry  as  to  the  amount 
a  bank  carries  for  "exchange  account"  this  must  be 
approximated.  The  approximation  here  given,  how- 
ever, is  a  deduction  from  "loans  to  reserve  agents" 
(another  account  which  is  carried  as  an  invested- 
reserve  for  the  purpose  of  supporting  the  cash-re- 
serve) and  therefore  one  which  should  be  capitalized. 
As  to  the  securities  held,  in  so  far  as  they  are  not  held 
as  reserve  equipment,  they  are  not  a  banking  re- 
source, and  like  "real-estate"  are  in  the  nature  of  an 
encumbrance  on  banking  capital.  Such  assets  must 
be  either  for  support  to  bank-credit  or  for  direct 


108 


THE   BANK   AND   THE   TREASURY 


Statement  oj  Equipment  Actually  Used  by  the  Several  Classes  Compared 
with  Capital  Provided 

(Stated  in  Millions  of  Dollars) 


Classes  of  Capital  Items 


Unavailable  Capital  Outlays  : 

"  Banking-house,"       "  real-estate," 
and  "  margins  " 

Redemption  Equipment  Used  : 

Cash-reserves 

Exchange  account 

Securities 

Loans  to  reserve  agents 

Total  equipment  carried 

Actual  capitalization  provided 

Equipment  carried  on  floating  debt.. 
Percentage  of  floating  debt 


5o 

•5 

2.4 

lo.i 


521.9 

520.5 
1.4 
7% 


$101 


183 
18 

237 
221 


$760 


62 
9% 


$186 


606 

61 

446 

365 


$1,664 


>i,3io 

354 

27% 


147 

15 

116 

145 


144 

44% 


_.-  « 

a  >  (/) 
u  C  ^ 


$43 


275 
27 

94 


$439 

$291 

148 

51% 


208 
21 
79 


$346 

$215 

131 

60% 


investment.  In  either  case  the  bank  should  not  buy 
bonds  on  credit.  Taking  the  charges  against  capital 
Amount  oj  in-  ^^  ^^ey  stand  and  the  redemption 
crease  in  capital  equipment  actually  used,  we  find  that 
needed  ^^^  ^^^  United  States,  in  the  judgment 

of  bankers  themselves  as  reflected  in  practice,  the 
banks  should  have  provided  $354,000,000  more  of 
capital  to  support  their  business.  That  is,  to  prop- 
erly support  $4,363,000,000  of  credit  used  in  the 
course  of  bank  operations  to  purchase  $4,363,000,000 
of  income-producinp;  assets,  the  equipment  which 
was  actually  used  should  have  been  provided  by  the 


A  POINT  NOT  COVERED  BY  THE  BANK  ACT      109 

proprietors  of  the  business.  Such  a  provision  would 
require  an  increase  of  twenty-seven  per  cent  in  total 
bank  capitaUzation.  But  further  inquiry  would 
show  that  all  but  about  five  per  cent  of  this  gross 
amount  of  capital  to  make  up  the  shortage  would  be 
required  from  the  reserve  city  banks,  and  that  nearly 
one-half  of  the  entire  increase  is  needed  in  the  City 
of  New  York.  Such  would  be  the  inevitable  con- 
clusion if  we  accept  the  business  judgment  of  bankers 
themselves  as  to  the  needs  for  banking  equipment. 

The  Inadequacy  of  the  Bank  Act 

Again  the  position  before  taken  is  affirmed,  —  that 
this  is  not  proposed  as  a  true  method  of  analysis  to 
get  at  the  relation  of  intensity  of  credit  strain  to 
equipment  used.  Attention  is  directed  only  to  the 
fact  that  such  an  element  should  be  taken  into  ac- 
count in  reports,  the  purpose  of  which  is  to  furnish 
the  data  for  official  control  as  a  means  of  protecting 
the  country  against  ''unsound"  banking  and  an 
"inelastic"  currency.  Further,  it  is  suggested  that 
no  provision  is  made  in  the  present  form  of  report 
for  ascertaining  these  data;  and  only  one  provision 
of  law  is  made  to  protect  the  public  against  any 
The  only  protec-  overtaxing  of  capital  equipment.  This 
lion  against  in-  one  provision  referred  to  is  the  clause 
fiation  which  imposes  a  minimum  limit  in 

money-reserve  to  be  kept.  This  limitation  imposed 
does,  in  fact,  operate  to  prevent  some  of  the  least 


110       THE  BANK  AND  THE  TREASURY 

provident  bankers  from  bringing  their  house  down 
on  the  heads  of  customers,  and  precipitating  a  panic 
in  the  business  community.  Nevertheless,  the  pro- 
vision is  entirely  inadequate  to  prevent  an  overtaxing 
of  equipment.  To  illustrate  one  of  the  methods 
used  for  complying  with  the  law,  and  at  the  same 
time  for  carrying  a  load  that  keeps  the  institution  on 
the  verge  of  credit  collapse :  —  From  the  published 
reports  it  appears  that  a  number  of  banks  have  indi- 
vidual deposits  outstanding  amounting  to  from  ten 
to  twelve  times  their  capitalization.  Some  of  these 
banks  continuously  carry  a  cash  fund  larger  than 
their  capital-stock,  surplus  and  undivided  profits. 
They  also  carry  large  holdings  of  stocks,  bonds,  and 
other  securities.  Where  did  they  obtain  this  money  ? 
Undoubtedly  they  borrow^ed  it.  Where  did  they  get 
their  other  redemption  equipment?  Undoubtedly 
by  means  of  a  floating  debt.  In  several  instances, 
only  about  one-third  of  the  redemption  equipment 
constantly  used  by  these  banks  is  provided  by  means 
of  capitalization ;  the  balance  is  obtained  on  demand 
loans.  Imagine  another  enterprise  being  financed 
in  this  manner.  With  methods  of  capitalization  ad- 
mittedly unsafe  if  applied  to  another  business,  is  it 
to  be  presumed  that  our  system  of  commercial  credit 
will  be  "sound"  and  capable  of  rendering  the  highest 
service  to  the  business  community  so  long  as  these 
methods  are  permitted  ? 
This  is  not  to  be  considered  as  imputing  fault  to  a 


A  POINT  NOT  COVERED  BY  THE  BANK  ACT      111 

banker  for  doing  business  in  this  way.  If  a  banker 
finds  that  he  may  obtain  capital  from  others  with 
which  to  do  business,  and  that,  when  a  sudden  de- 
The  individual  "land  comes  for  payment,  he  can  force 
banker  primarily  his  commercial  customers  to  find  the 
no  a  fan  means  necessary  to  replace  the  tempo- 

rary foundations  withdrawn,  if  by  such  methods  the 
banker  maybe  able  to  keep  his  own  house  from  falling 
on  the  heads  of  managers  and  stockholders,  he  maybe 
exonerated  on  the  principle  that  he  has  availed  him- 
self of  a  business  advantage  which  has  brought  a  large 
return  in  profits.  The  method  may  be  excused  in  the 
case  of  the  individual  bank.  But  what  is  the  result 
of  this  character  of  banking  to  the  commercial  com- 
munity? And  what  of  a  general  law  and  adminis- 
tration which  permits  such  an  individual  practice? 
As  a  National  system  this  is  another  form  of  "wild- 
cat" banking,  and  it  is  in  this  very  practice  that  we 
find  much  of  the  trouble  that  heretofore  has  been 
ascribed  to  inelasticity  of  the  currency.  The  prime 
fault  is  in  a  law  which  permits  bank  capitalization 
inadequate  to  maintain  the  volume  of  bank-credit 
offered  by  banks  to  the  community  as  a  circulating 
medium  with  which  to  do  business  and  of  which 
customers  have  availed  themselves.  This  form  of 
bank-credit  being  suddenly  withdrawn  to  protect  the 
bank  from  its  own  weakness,  the  community  and  the 
individual  customers  of  the  bank  are  left  in  a  crippled 
condition,  to  struggle  against  financial  loss. 


112  THE   BANK   AND  THE  TREASURY 

One  of  the  purposes  of  control  should  be  to  secure 
a  better  coordination  between  the  volume  of  credit- 
Additional  ele-  accounts  sold  and  capital  equipment 
ments  of  control  provided  as  a  means  of  support ;  to 
needed  ^j^-^  ^^^  ^^^  National  Bank  Act  needs 

revision.  But  having  been  revised  so  as  to  give  the 
Comptroller  power  to  exercise  supervision,  to  prevent 
the  overstraining,  as  well  as  the  "impairment"  of 
capital,  the  present  power  to  compel  reports  is  suffi- 
cient to  make  the  supervision  effective.  One  of  the 
principal  purposes  of  the  Bank  Act  is  to  guard  integ- 
rity of  our  financial  system  and  to  protect  the  public 
against  loss  on  account  of  inadequate  bank  capital- 
ization. To  effect  the  full  purpose  of  the  Act,  to 
vouchsafe  a  system  of  control  which  will  secure 
"sound  banking"  as  well  as  "sound  currency,"  there 
should  be  added  to  the  present  powers  which  are 
intended  to  protect  against  an  impairment  of  capital, 
inquisitory  powers  directed  against  an  overloading 
of  equipment.  As  a  means  of  executing  this  author- 
ity, classified  schedules  should  be  devised  which  will 
furnish  the  information  necessary  to  intelligent  offi- 
cial discretion,  and  classified  financial  statements  of 
results  should  be  published,  that  the  public  may  the 
more  intelligently  deal  with  the  banks. 


Chapter  IX 

CHARACTER    OF    ASSETS    TO    BE    HELD    BY    BANKS    AS 
' '  INVESTED-RESERVES ' ' 

To  restate  conclusions:  If  we  define  capital-re- 
sources as  those  assets  which  represent  capital  outlay 
(assets  purchased  by  means  of  capital-funds  or  which 
are  to  be  charged  against  capital-account),  then  it  is 
in  financial  statements  of  capital-resources  that  the 
capital  outlays  of  a  business  are  to  be  accounted  for. 
In  a  banking  business,  there  are  two  general  classes 
of  capital-assets,  viz.,  (i)  those  in  the  nature  of  physi- 
cal equipment,  and  investments  not 
A  restatement  of  m   i  i      .  ^    i,      i  •        i. 

conclusions  available  to  support  bankmg  trans- 

actions, and  (2)  the  banking  or  re- 
demption equipment  —  resources  which  have  been 
provided  or  which  are  being  held  to  support  current 
banking  operations.  Investments  in  assets  of  the 
first  class  referred  to  (not  being  a  necessary  part  of 
the  business)  may  be  treated  simply  as  an  encum- 
brance on  capital;  outlays  for  assets  of  the  second 
class  (or  what  we  may  term  "redemption  equip- 
ment") are  essential  to  the  business  of  banking. 
Again,  under  present  business  conditions  the  "re- 
demption equipment"  of  a  bank  is  necessarily  made 

[113] 


114       THE  BANK  AND  THE  TREASURY 

up  of  two  general  classes  of  resources,  viz.,  (i)  the 
*'cash,"  which  is  made  up  of  the  "money-reserve" 
on  hand  retained  as  a  means  of  protecting  the  bank 
against  default  on  current  or  ordinary  local  money- 
demands  on  credit-accounts,  and  exchange-balances 
kept  with  correspondents  to  meet  foreign  demands 
for  money  on  credit-accounts,  and  (2)  those  assets 
which  are  held  as  an  "  in  vested-reserve "  as  a  means 
of  obtaining  "cash"  to  meet  extraordinary  demands 
on  credit-accounts  outstanding.  The  purpose  of  a 
legal  requirement  for  adequate  capital  equipment 
is  to  insure  the  "soundness"  of  credit-accounts  of 
banks  sold  to  customers  for  use  as  funds,  without 
forcing  a  sudden  contraction  of  the  circulating  me- 
dium and  a  consequent  credit  collapse.  The  reason 
for  carrying  a  part  of  the  equipment  as  "in vested- 
reserves"  is  to  decrease  the  capital  cost  to  the  bank. 
From  such  a  view  of  the  capital-resources  of  commer- 
cial banks,  and  such  a  statement  of  the  uses  of  the 
two  kinds  of  redemption  equipment  (viz.,  "cash" 
and  "invested-reserves"  or  capital  investments  read- 
ily convertible  into  cash),  inquiry  may  be  made  as  to 
the  character  of  assets  which  a  bank  may  hold  as  an 
"invested-reserve."  What  character  of  "invested 
capital  reserves"  will  contribute  best  to  the  purposes 
(public  and  private)  for  which  they  are  held  ? 

Generally  speaking,  there  are  three  kinds  of  in- 
vestments in  which  a  bank  may  employ  capital-re- 
sources not  needed  in  the  form  of  "cash,"  but  which 


ASSETS   TO  BE  HELD  AS   "RESERVES"  llo 

are  necessary  to  the  equipment  of  the  bank  for  the 
support  of  outstanding  accounts.  These  may  be 
described  as  follows:  (i)  Loans  to  other  commercial 
institutions;  (2)  stocks,  bonds,  and  other  securities; 
Classes  oj  re-  ^"^^  (s)  the  commercial  paper  pur- 
serve  capital  in-  chased  from  those  who  are  not  de- 
vestments  positors.    That  is  to  say,  the  "loans 

to  other  commercial  institutions,"  the  "stocks,  bonds, 
and  other  securities,"  and  the  "commercial  paper" 
which  are  to  be  considered  as  "reserve  capital-in- 
vestments" are  assets  which  have  not  been  purchased 
by  means  of  credit-accounts  of  the  bank.  And  in 
making  financial  statements  of  "capital-resources" 
and  "capital-liabilities"  the  bank  should  clearly 
indicate  what  paper  or  assets  are  to  be  considered  as 
chargeable  to  capital-account.  These  three  classes 
of  investments  will  be  separately  considered. 

Demand  Loans  to  Other  Banks  as  Reserve- 
Capital  Investments 

It  is  the  common  practice  among  banks  to  loan  a 
portion  of  their  capital-resources  to  other  banks. 
The  reason  for  this  is  not  a  public  one,  but  to  de- 
crease the  capital  cost  to  the  bank.  Such  loans  are 
set  up  in  published  summaries  under  two  heads;  viz., 
(i)  amounts  "due  from  reserve  agents,"  and  (2) 
amounts  "due  from  other  banks."  Regarding  the 
practice  from  the  point  of  view  of  public  interest, 
these  loan  accounts  have  been  considered  as  assets 


lie  THE   BANK   AND  THE  TREASURY 

immediately  available  for  procuring  cash  to  meet 
money-demands.  So  general  and  so  plausible  is 
Loans  called'' de-  ^^is  assumption,  that  it  was  made  a 
posits  with  re-  part  of  the  National  Bank  Act,  under 
serve  agen  s  which  both  classes  of  items  are  ac- 
counted as  cash.  The  general  acceptance  of  this 
conclusion  rests  on  fallacy.  The  conclusion  has  been 
supported  by  reasoning  from  analogy.  In  mercan- 
tile business  a  bank-account  is  properly  considered 
"cash";  the  primary  purpose  of  a  merchant's  bank- 
account  is  to  provide  the  means  necessary  for  meeting 
current  commercial  demands. 

While,  however,  this  is  true  of  the  merchant,  it 
does  not  necessarily  follow  as  to  the  banker.  It  may 
not  be  assumed  that  a  credit-account  of  one  bank 
against  another  bank  should  be  considered  as  cash- 
capital  equipment.  For  the  purposes  of  the  bank, 
this  assumption  goes  afield  at  four  points:  (i)  Since 
the  business  of  the  bank  is  one  of  purchasing  "com- 
Accountswith  mercial  assets"  by  exchanging  its 
other  banks  as  credit-accounts  for  the  use  of  its  cus- 
equipment  ^^^^^^  ^^  "cash,"  the  bank  is  in  a 

different  funding  relation  than  the  merchant  accom- 
modated; while  the  merchant  may  settle  his  credit 
obligations  by  bank  credit,  the  bank  must  make  pro- 
vision for  the  settlement  of  credit  balances  in  money. 
(2)  The  checking  out  or  transfer  of  the  accounts  of 
one  bank  to  customers  of  other  banks  outside  of  the 
immediate  locality  must  be  settled  through  the  estab- 


ASSETS   TO   BE  HELD  AS   "RESERVES"  117 

lishment  of  an  exchange  base  in  other  cities ;  whether 
this  exchange  base  is  in  the  form  of  money  or  of 
rights  to  "draw,"  a  considerable  portion  of  the  fund 
cannot  be  made  available  for  the  payment  of  local 
demands  and  for  the  settlement  of  local  exchanges. 
The  exchange  account  is  capital  tied  up  for  the  sup- 
port of  exchange  transactions  and  cannot  be  con- 
verted into  money  without  crippling  the  bank's 
operations.  (3)  To  permit  one  bank  to  sell  its 
"money-reserves"  to  another  bank  for  a  credit  or 
"reserve-account,"  and  then  to  permit  the  selling 
bank  to  treat  the  "account"  as  cash  to  any  greater 
extent  than  it  may  be  necessary  for  the  second  bank 
to  retain  the  money  in  its  vaults  to  meet  the  exchange 
demands  of  the  first  bank,  is  to  permit  both  banks 
to  extend  their  credit-accounts  on  the  same  capital 
support  and  thus  to  weaken  the  equipment  of  both, 
since  a  demand  of  one  bank  on  another  bank  for 
settlement  is  a  demand  for  money.  (4)  By  account- 
ing "amounts  due  from  other  banks"  as  "cash," 
without  distinction  as  to  the  exchange  purpose  of 
their  creation,  and  through  the  regular  practice  of 
loaning  money-surplus  to  reserve  agents,  the  reserve 
city  banks  have  been  encouraged  to  give  support  to 
underwriting  syndicates  and  to  margin  speculation 
at  the  same  time  that  the  "depositing"  bank  is  ex- 
tending its  credit-accounts  with  customers.  A  very 
large  portion  of  accounts  (deposits)  held  by  customers 
against  reserve  city  banks  are  credit-contracts  created 


118       THE  BANK  AND  THE  TREASURY 

in  exchange  for  call-loans,  which,  under  ordinary 
circumstances,  may  be  quickly  realized  on  by  the 
reserve  bank;  these,  however,  are  not  immediately 
convertible  in  time  of  panic  without  undermining  the 
whole  credit  structure ;  at  such  times  a  general  process 
of  forcing  liquidation  constricts  the  circulating  me- 
dium to  an  extent  that  proves  ruinous  to  business. 
Whenever  an  unusual  demand  for  payment  of  loans 
is  made  by  country  banks  on  reserve  agents,  such 
demands  force  the  reserve  banks  to  restrict  their  own 
accommodations,  and  thus  contract  the  circulating 
medium. 

The  underlying  fallacy  of  the  reasoning  which  is 
back  of  that  part  of  the  Bank  Act,  and  back  of  the 
theories  which  give  sanction  to  the  practice  itself, 
may  be  seen  when  we  analyze  the  character  of  the 
investment.  In  so  far  as  bank  A  does  not  need  the 
reserve  fund  or  account  kept  with  the  reserve  city 
The  fallacy  en-  bank  B,  as  an  exchange  base  (i.e.,  for 
gaged  by  the  a  current  purpose)  it  is  investing  its 
Bank  Act  capital  in  the  same  kind  of  a  credit 

obligation  as  is  the  call-loan  customer  of  bank  B. 
Bank  A  is  degrading  its  investment  judgment  to  the 
same  level  as  an  ordinary  speculator,  and  receiving 
therefore  a  rate  of  interest  little  if  any  higher  than 
might  be  received  on  U.  S.  Government  bonds. 
Bank  A's  investment  (account  with  B)  is  one  de- 
signed to  be  held  as  "available"  for  the  purpose  of 
obtaining  cash  to  meet  an  extraordinary  demand. 


ASSETS   TO  BE  HELD  AS   "RESERVES"  119 

But  extraordinary  demand  is  usually  associated  with 
market  conditions  which  make  "call-loans"  the  most 
delicate  of  all  commercial  assets.  Yet  for  this  pur- 
pose bank  A  holds  an  open  account  of  bank  B,  which 
in  turn  has  treated  the  money  borrowed  from  bank 
A  as  a  "cash-reserve"  to  support  accounts  of  specu- 
lators and  to  meet  demands  made  on  its  own  ac- 
counts. This  is  the  common  practice  in  New  York 
City.  By  reference  to  Chart  VIII,  opposite  page 
152,  it  may  be  seen  that  the  "deposits"  of  country 
banks  furnish  nearly  all  the  money  held  by  New 
York  City  banks  as  a  means  of  supporting  about 
$1,000,000,000  of  demand  accounts  of  customers. 

It  is  not  a  new  experience  in  the  financial  world  for 
reserve  city  banks  to  temporarily  suspend  money 
payment  to  protect  themselves  against  the  banker's 
demand  for  money  on  payment  of  drafts  and  ex- 
change-balances. The  vicious  tendency  of  such  a 
practice  of  borrowing  a  money-reserve  from  other 
banks  and  of  lending  the  credit  of  borrowing  banks  to 
speculative  enterprise  has  been  a  subject  of  com- 
ment by  every  Comptroller  from  the  foundation  of  the 
National  banking  system  down  to  and  including  Mr. 
Unavailability  oj  Knox;  and  the  undesirability  of  in- 
reserye  accounts    vesting  capital  of  commercial  banks  in 

in  time  of  strain    i  a      a  i.   ?? 

'  loans  to      reserve-agents     was  agam 

pointed  out  by  Mr.  Dawes  in   1898.     While  under 

ordinary  circumstances   they   may   be    convertible, 

"loans  to  other  banks"  cannot  be   considered  the 


120       THE  BANK  AND  THE  TREASURY 

best  kind  of  reserve-capital  investment.  There  may 
be  many  reasons  why  the  banks  of  reserve  cities 
would  be  in  favor  of  such  a  practice,  but  from  the 
point  of  view  of  elasticity  and  general  welfare  the 
practice  should  be  publicly  and  legally  condemned. 

"Securities'^  as  Reserve-Capital  Investments 

As  to  State  banks,  private  banks  and  trust  com- 
panies, it  is  shown  that  a  large  proportion  of  the 
securities  owned  are  in  forms  not  easily  marketable 
when  occasion  requires.  The  National  banks  have 
no  published  statistics  of  the  proportion  of  the  several 
classes  of  stocks,  securities,  etc.,  held,  but  the  reports 
About  one-half  o}  ^o  show  that  about  one-half  of  their 
bank  capital  so  capital  and  surplus  is  invested  in 
^"^'^■^^  stocks,  bonds,  and  other  securities;  it 

is  also  shown  that  these  assets  yielded  little  support  to 
the  credit-accounts  in  time  of  emergency  or  extraor- 
dinary money-demand.  Such  a  showing  and  such 
experiences,  however,  do  not  warrant  the  conclusion 
that  stocks,  bonds,  and  other  securities  which  may  at 
once  be  converted  into  cash  to  meet  money-demands 
on  accounts  outstanding  may  not  be  effectively  used 
as  "reserve-capital  investments." 

It  may  be  stated  as  a  demonstrable  conclusion 
that  such  investments  are  not  always  convertible 
into  money  hy  sale  without  loss  to  the  bank.  But 
while  a  favorable  market  may  not  always  be  found 
in  which  even  stocks  and  bonds  which  are  considered 


ASSETS   TO   BE  HELD   AS       RESERVES  121 

as  "gilt  edge"  may  be  realized  on  without  loss  to 

invested  principal,  in  time  of  monetary  disturbance, 

securities  of  this  class  may  usually  be 
Convertibility  by         ■,.      ■,  ,  ,  , , 

^^Ig  realized  on   by   sale  as  soon  as  the 

emergency  is  passed ;  in  time  of  finan- 
cial depression  it  very  often  happens  that  investments 
of  the  first  rank  rise  to  a  higher  point  than  during  a 
period  of  credit  inflation  for  the  reason  that  "gilt- 
edge"  securities  are  then  relatively  scarce  and  are 
the  only  ones  to  which  investment  capital  is  attracted. 
Elasticity,  however,  depends  on  immediate  con- 
vertibility. Although,  in  an  emergency,  "gilt-edge" 
securities  may  not  be  converted  by  sale  without  in- 
vestment loss,  money  may  always  be  obtained  on 
them  by  a  process  of  hypothecatioji.  The  large  finan- 
cial companies,  such  as  savings  banks,  trust  com- 
panies, insurance  companies,  etc.,  which  have  few 
demand  obligations  to  meet  and  which  at  the  same 

time  have  large  funds  available  for 
Convertibilitv  by   .  ,  ,  ^      .i 

hypothecation       ^vestment,  may  come  to  the  rescue 

of  the  commercial  banks  through 
loans,  in  case  the  banks  do  not  care  to  realize  on  their 
securities  by  sale  at  an  unfavorable  market  rate.  In 
obtaining  cash  by  loans  or  sales  of  their  own  col- 
laterally secured  credit  obligations  the  banks  are  able 
to  realize  on  reserve-capital  investments  of  this  kind, 
by  hypothecating  their  securities  with  investment 
institutions.  In  such  event  the  only  part  of  the  in- 
vested capital  not  available  for  present  needs  is  the 


122  THE  BANK  AND  THE  TREASURY 

amount  represented  in  the  "margins."  It  is  by  this 
process  that  the  Government  assists  national  banks 
to  obtain  money  on  such  investments  without  loss. 

Special  facility  is  given  for  such  a  disposition  under 
our  present  Law.  Two  methods  are  provided  where- 
by the  United  States  Treasury  may  permit  the  imme- 
diate conversion  of  "gilt-edge"  securities.  In  the 
first  place,  "United  States  bonds"  may  be  hypothe- 
cated for  "issues";  in  the  second  place  (under  the 
special  facilities  ^^^^  recent  ruling  of  the  Secretary), 
for  hypothe-  when  the  Government  has  a  Treasury 
'^'^^^"^^  surplus,    "gilt-edge"   securities    may 

be  hypothecated  for  gold,  z.e.,  "Government  de- 
posits," which  immediately  give  to  the  banks  receiv- 
ing them  an  exchange-balance  against  the  Treasury. 
In  order  to  avail  themselves  of  these  aids,  however, 
the  Government  requires  that  the  banks  have  unen- 
cumbered "gilt-edge"  securities  to  hypothecate,  and 
this  is  what  the  banks  in  many  instances  have  failed 
to  do. 

Again,  "gilt-edge"  securities  which  are  unencum- 
bered may  at  any  time  be  hypothecated  in  the  general 
loan  market.    For  the  purpose  of  procuring  tempo- 
rary loans,   the  loan  capital  of  the 
Support  of  the  ,.  .  ,  ,1  1 

loanmarket         ^^t^^^    commercial    world    may    be 

availed  of.  There  are  no  institutional 
or  National  limits  to  a  good  investment  security.  It 
is  to  assist  in  the  process  of  international  investment 
as  a  means  of  relieving  National  financial  distress 


ASSETS   TO  BE  HELD  AS   "RESERVES"  123 

that  the  "rate"  is  so  often  raised  by  the  Bank  of 
England.  The  loan  market  is  not  local  or  National. 
In  the  past,  the  inability  of  banks,  which  have  in- 
vested capital  in  securities,  to  obtain  money  by  sale 
has  been  due  to  one  of  two  practices:  Either  the  bank 
has  departed  from  the  banking  business  and  has  be- 
come a  dealer  in  securities  for  the  purpose  of  making 
its  profits  on  buying  and  selling  instead  of  looking 
primarily  to  interest  payments  on  commercial  accom- 
modation, or  its  officers  have  been  guilty  of  adminis- 
trative indiscretion  in  the  purchase  of  securities 
which  are  intended  to  give  support  to  their  own  credit- 
accounts.  Their  inability  to  obtain  funds  by  hypoth- 
ecation has  been  due  either  to  the  weakness  of  the 
Practices  which  security  itself  (as  frequently  happens 
have  prevented  when  the  bank  engages  in  underwrit- 
conversion  j^^  ^^^  ^^^^^  speculative  ventures), 

or  to  the  fact  that  they  have  already  hypothecated 
their  "gilt-edge"  holdings.  An  instance  of  failure 
from  the  first  cause  —  i.e.,  on  account  of  the  char- 
acter of  the  weakness  of  its  investments  —  is  found 
in  a  recent  collapse  of  a  large  institution  which  had 
sought  without  success  to  obtain  a  million  dollar  loan 
on  the  security  of  eight  million  dollars  of  securities 
held.  Instances  of  inability  of  banks  to  obtain 
money  for  pressing  need  on  account  of  "gilt-edge" 
securities  having  already  been  hypothecated  are 
many;  and,  under  the  present  Law  and  practice,  the 
Government  holds  out  a  permanent  inducement  for 


124       THE  BANK  AND  THE  TREASURY 

banks  to  weaken  their  equipment  through  the  hy- 
pothecation of  their  best  investment  assets.  The  in- 
ducement referred  to  is  the  offer  on  the  part  of  the 
Government  to  exchange  "notes"  and  "deposits" 
for  secured  accounts  of  the  bank,  without  interest. 
The  result  is,  that  the  banks,  as  a  means  of  increasing 
their  profits  during  times  of  ordinary  money-demand, 
or  so-called  periods  of  prosperity,  encumber  their 
best  invested  assets  by  hypothecation,  and  in  time  of 
money  stringency  and  extraordinary  demand  they 
are  unable  to  support  their  credit-accounts  (deposits) 
without  forcing  "loans." 

Commercial  Paper  as  Reserve-Capital  Investments 

Commercial  paper  held  as  "reserve-capital"  in- 
vestments must  be  clearly  distinguished  from  com- 
mercial paper  purchased  by  means  of  credit-accounts, 
i.e.,  by  exchange  for  deposits.  Commercial  paper 
which  is  obtained  for  direct  investment  of  a  bank's 
How  capital  is  capital  is  usually  obtained  through  its 
invested  in  com-  own  loan  brokers,  or  through  a  com- 
merctal  paper  j^gj-^ial  paper  house  or  note-broker. 
Their  own  loan  brokers  are  represented  in  the  "loan 
crowd"  who  are  seeking  to  invest  the  money  surplus 
for  the  bank.  The  note-broker  would  obtain  a  mar- 
ket for  the  paper  of  his  customers.  The  business  of 
the  note-broker  is  to  find  banking  houses  or  other 
loaners  of  capital  who  are  looking  for  this  kind  of 
investment. 


ASSETS   TO  BE  HELD  AS   "RESERVES"  125 

Ordinarily  a  bank  will  not  buy  paper  of  one  who 
is  not  a  customer  if  it  has  enough  paper  offered  by 
its  customers  to  fully  employ  its  capital.  The  reason 
for  this  is  that  a  customer's  note  may  be  purchased 
in  exchange  for  a  credit-account  of  the  bank  (a  de- 
posit).    The  bank  with  its  own  capital  used  as  a 

"redemption  reserve,"  therefore,  may 
A  '^reserve"  cap-  ,  i  i.-  ^.u  i.     r 

italinvestmeni      purchase  several  times  the  amount  of 

commercial  paper  from  its  customers 
that  it  can  by  direct  investment  of  capital  in  the  notes 
of  those  who  are  not  customers ;  as  a  result  a  propor- 
tionately larger  return  in  profit  will  be  received  from 
the  exchange  with  customers.  The  bank  will  loan 
through  its  broker,  or  will  offer  to  purchase  paper 
through  a  note-broker,  only  as  a  means  of  investing 
a  "capital"  surplus,  and  this  may  be  used  as  an 
"  in  vested-reserve "  without  contracting  or  forcing 
loans  to  customers. 

Demands  for  payment  made  on  these  notes  do  not 
reflect  on  the  bank  itself  through  forcing  the  customer 
{i.e.,  the  holder  of  its  own  accounts)  to  convert. 
Neither  do  payments  at  maturity  so  seriously  disturb 
the  commercial  world  as  do  sudden  demands  on 
"call"  or  short-time  paper.     The  paper  purchased 

through  note-brokers  usually  runs  for 
How  the  practice     •  ,  •     ,     j  ^i      j   r    v  •   j 

impairs  elasticity  ^^^ty  or  nmety  days,  the  definite  period 

for  which  funds  are  needed  by  the  one 
selling  his  paper),  and  payment  will  be  made  by  vol- 
untary liquidation.     Such  demands,  however,  may 


12G  THE  BANK  AND  THE  TREASURY 

quite  as  seriously  interfere  with  the  principle  of 
elasticity  of  the  bank-account  as  a  circulating  me- 
dium, since  a  narrowing  market  for  these  loans,  or 
the  refusal  to  renew  when  renewals  are  asked,  may 
require  liquidation  of  the  accounts  where  they  are 
kept,  and  this  liquidation  may  result  in  violent  con- 
traction. 

Under  such  circumstances,  commercial  paper  must 
be  regarded  as  a  very  high  class  of  investment  for 
surplus  "capital"  so  far  as  the  interests  of  the  indi- 
vidual bank  are  concerned.  Such  investments  are 
also  in  the  line  of  true  banking  for  profits  from  interest 
accrued  in  commercial  accommodations.  But  never- 
theless investments  of  capital-funds  in  commercial 
paper  to  be  held  as  a  ''surplus-reserve"  may  be  con- 
sidered of  doubtful  character  for  the  community  at 

large.  Commercial  paper  is  used  by 
Urtj%dkT'  the  business  man  to  obtain^  current 

funds.  Capital-investment  in  com- 
mercial paper  may  at  any  time  put  the  bank  in  the 
position  of  forcing  the  customers  of  other  banks  to 
liquidate,  and  thereby  may  cut  off  banking  accom- 
modation when  accommodation  is  most  needed. 
Besides,  such  a  practice  tends  to  relieve  the  banks  of 
a  locality  from  responsibility  for  capitalizing  to  meet 
the  funding  needs  of  its  local  constituency. 


Chapter  X 

PUBLIC  DANGERS   IN  THE  PRESENT  EQUIPMENT 
OF   NATIONAL  BANKS 

Although  the  total  liabilities  of  failing  banks 
approaches  $300,000,000,  the  direct  losses  to  custom- 
ers has  been  less  than  $50,000,000.  This,  reduced 
to  a  percentage  of  loss  on  total  liabilities  of  all  Na- 
tional banks  per  year,  would  amount  to  about  one- 
twentieth  of  one  per  cent,  or  to  about  one-fifth  of 
one  per  cent  on  capital  employed  in  the  business. 
The  average  direct  loss,  however,  is  not  the  primary 
consideration,  more  than  is  the  average  direct  loss  on 
the  circulation  of  counterfeit  coins,  or  the  average 

direct  loss  on  depreciated  currency. 
Losses  jrom  hank  rr-.     ,1       •     i-   -j      1    -1       1         •     •      ^.i 
failure  ^^  ^^^  mdiviQual  the  loss  is  m  the 

sudden  disappearance  of  his  entire 

account  so  far  as  its  use  as  current  funds  is  concerned. 

Without  notice  or  opportunity  to  protect  himself,  he 

is  deprived  of  his  "cash."     To  him  the  immediate 

loss  is  as  great  as  if  he  were  the  victim  of  a  robbery; 

his  indirect  loss  is  greater,  owing  to  the  difficulty  of 

again  providing  himself  with  current  funds  at  a  time 

when  the  credit  of  the  whole  community  is  strained 

[m] 


128       THE  BANK  AND  THE  TREASURY 

by  the  sudden  shock  and  the  concurrent  cutting  off 
of  funds  from  all  the  customers  of  the  failing  institu- 
tion. This  suggests,  also,  an  incidental  loss  to  the 
whole  trading  community,  the  extent  of  which  cannot 
be  measured  or  estimated. 

The  suggestion  here  made  is  not  intended  as  an 
arraignment  of  the  National  banking  system  so  far 
as  the  solvency  of  its  banks  is  concerned.  The  fact 
is  that  the  individual  bank  has  managed  to  protect 
itself  against  insolvency  and  that  the  direct  losses  to 
"depositors"  have  not  been  proportionately  larger 
than  to  those  of  any  other  of  the  great  banking  sys- 
tems of  the  world.  It  is  not  to  this  aspect  of  the  situa- 
tion that  pleas  for  increased  "elasticity"  are  directed. 

Arguments  for  elasticity  have  refer- 
Direct  financial  .,     -i  it  .  •  .i      • 

loss  not  the  issue  ^ncc  to  the  public  question  —  the  m- 

direct  losses  due  to  inability  of  the 
banks  of  the  system  to  adjust  their  credit  accommo- 
dations to  current  demands.  The  plea  is  not  for 
increased  security  to  the  stockholders  of  the  bank  as 
a  means  of  protecting  them  against  insolvency,  nor 
for  the  guarantee  of  the  accounts  of  banks.  In  so  far 
as  such  proposals  are  made  they  are  purely  incidental. 
The  whole  question  of  elasticity  is  a  public  one, 
having  to  do  with  the  protection  of  the  circulating 
medium  against  sudden  contraction  as  a  means  of 
preventing  loss  to  the  individual  bank  and  to  the 
individual  customer.  It  is  to  this  end  that  a  correla- 
tion is  advocated  between  the  capital  support  pro- 


DANGERS    IN   PRESENT   EQUIPMENT  120 

vided  for  credit-accounts  and  the  amount  of  credit- 
accounts  to  be  supported. 

Capital  Equipment  and  Credit  Strain  on  the  System 

That  the  National  banking  system  may  be  under- 
stood with  respect  to  capitaHzation,  the  resources  and 
liabihties  of  all  the  National  banks  of  the  United 
States  are  exhibited  in  classified  balance  sheet  form 
opposite  page  130.  In  this  an  attempt  is  made  to 
re-arrange  the  various  items  reported  by  the  banks  to 
the  Comptroller  in  such  a  way  as  to  show  (i)  the 
character  of  properties  purchased  by  capital  outlay 
which  are  unavailable  for  the  support  of  banking 
transactions;  (2)  the  classes  of  resources  which  are 
to  be  considered  in  the  nature  of  redemption  equip- 
ment, setting  opposite  these  two  classes  of  items 
the  capital  provided  by  the  stock  sales,  surplus,  and 
The  character  of  undivided  profits,  plus  the  amount 
equipment  illiis-  obtained  by  floating  debt ;  and,  (3) 
^^  ^  the    accounts    representing   banking 

operations  and  the  relation  of  the  redemption  equip- 
ment to  current  demand  liabilities.  Owing  to  the 
indefiniteness  and  uncertainty  of  the  data  contained 
in  the  Comptroller's  report  for  this  purpose,  these 
statements  must  be  taken  subject  to  the  same  quali- 
fications and  questions  raised  on  pages  94  and  95. 
But  until  a  form  of  report  is  prescribed  for  the  banks 
which  will  require  specific  declarations  in  classified 
form,  the  data  given  must  remain  the  best  obtainable. 


130       THE  BANK  AND  THE  TREASURY 

Assuming  this  to  represent  the  National  banking 
situation  on  September  9,  1903  (and  it  cannot  be  far 
afield,  for  the  reason  that  the  items  with  respect  to 
which  question  may  be  raised  would  not  materially 
alter  conclusions  as  to  the  results  by  classes),  and 
assuming  further,  as  does  the  National  Bank  Act 
itself,  that  an  amount  due  from  a  reserve  agent  is  to 
be  considered  a  part  of  the  "  in  vested-reserve "  and 
therefore  a  capital  charge,  it  would  appear:  (i)  that 
$186,904,932.68  of  the  capital  of  banks  was  invested 
in  properties  and  rights  that  were  not  available 
for  current  credit-redemptions  (viz.,  in  "banking- 
houses,"  "real-estate"  and  "margins"),  and  that  the 
banks  could  have  done  just  as  much  business  as 
going  banking  concerns  if  they  had  not  had  these 
resources;  these  (though  available  for  final  liqui- 
dation) were  unavailable  investments  and  operated 
as  a  reduction  of  banking  capital.  (2)  That  of  the 
two  kinds  of  redemption  equipment  (assuming,  as  in 
Chapter  VIII,  that  the  foreign  exchanges  were  only 
one-tenth  of  the  local  exchanges,  and  that  $60,583,- 
675.38  would  be  adequate  provision  for  these) 
$669,157,468.20  was  in  the  form  of  "cash-reserves," 
and  $811,543,333.22  was  in  the  form  of  "invested- 
reserves"  —  the  total  redemption  equipment  being 
equal  to  $1,480,700,801.42.  (3)  That  the  total  capi- 
tal provided  by  the  proprietors,  including  stock,  sur- 
plus, and  undivided  profits,  after  deducting  outlays 
for  the  unavailable  investments,  was  only  $1,1 23, 189,- 


CLASSIFIED  BALANCE  SHEET  OF  ALL  NATIONAL  BANKS  OF  THE  UNITED  STATES 


Capital  Resources 


fi    R^ltSa^.. ,- 

Sj8,.s6S 


Toial  sKUrilies  owned..    Ss^.gSj 


ASSETS  AND  LIABILITIES  RESULTIHG  FROM  BANKING  OPERATIONS 


Tatl' 

■^J^^S 

Uan»n 

^dL.». 

$3.48..4*6 

-dlmumol 

JjiA6,8 

a™.,, 

l.i»«J 

'""°"""'"'' 

Tnhl 

™„™.«., 

# 


DANGERS  IN  PRESENT  EQUIPMENT  131 

175.24,  there  being  a  difference  between  the  redemp- 
tion equipment  carried  and  the  capital  provided 
amounting  to  $357,511,626.18;  this  amount  was  bor- 
Redemption  rowed  from  other  institutions  and 
equipment— how  amounted  to  a  demand-credit  capital 
obtained  liability  or  floating  debt  incurred  in 

the  purchase  of  redemption  equipment.  To  reach 
such  conclusions,  it  is  to  be  observed,  no  assumption 
has  been  employed  that  is  not  based  on  the  plain 
provisions  of  the  Bank  Act  itself  —  viz.,  that  the 
"amounts  due  from  reserve  agents"  is  to  be  con- 
sidered a  part  of  the  "reserve-funds"  and  therefore 
a  capital  charge.  The  amount  of  this  demand-credit 
liability  (or  floating  debt)  must  be  subtracted  from 
the  available  redemption  equipment  before  the  net 
amount  of  capital  support  to  banking  operations  may 
be  obtained.  This  net  redemption  equipment, 
therefore,  amounted  to  ^1,123,189,175.24. 

To  measure  the  credit  tension,  or  the  strain  which 
is  brought  on  the  equipment  provided,  the  current 
credit-liabilities  must  be  brought  into  comparison 
with  the  net  redemption  equipment.     This  relation 

would  be  represented  by  the  fraction  1^^-^^ — ^^^S9- 

1,123,189,174.24 

or  if  reduced  to  percentage  the  capital  support  would 
appear  as  25.7  per  cent  of  the  banking  operations 
supported.  Still  another  result  would  be  obtained 
by  setting  off  the  institutional  assets  against  institu- 
tional liabilities.     Assuming  that  this  might  be  done 


132  THE   BANK  AND   THE   TREASURY 

without  impairing  the  banking  power,  the  net  bank- 
ing operation  would  amount  to$3, 493, 363, 570. 62,  and 
Credit  strain  on  the  relation  of  equipment  would  be 
redemption  equip-  raised  to  27.9  per  cent.  This  would 
"^^'^  be  the  measure  of  strain  on  the  as- 

sumption that  all  parts  of  the  redemption  equip- 
ment were  equally  available  for  the  support  of  credit. 
Of  this  equipment,  however,  $811,543,333.22,  or 
72.2  per  cent,  is  in  the  form  of  investments,  and  27.8 
per  cent  in  money-reserves.  Without  a  special  ex- 
amination of  these  investments  no  measure  may  be 
taken  of  their  strength.  Experience  shows  that  the 
amount  of  invested-reserves  actually  available  as 
equipment  to  meet  the  credit  strain  in  time  of  need 
falls  far  below  the  amount  and  proportion  above 
indicated.  With  this  statement  in  view  as  to  the 
method  of  arriving  at  the  conclusion  here  reached 
some  more  general  observations  may  be  made. 

A  Historical  View 

From  1869  to  1893  the  "money-reserves"  in  Na- 
tional banks  were  equal  to  about  50  per  cent  of  the 
share  capital.  During  the  same  period  the  com- 
bined amounts  of  money-reserves  plus  the  unencum- 
bered securities  ("United  States  bonds,"  "stocks, 
securities,  etc.")  were  equal  to  about  50  per  cent  of 
the  share  capital  plus  the  surplus.  Investments  in 
the  nature  of  loans  to  other  banks  made  up  a  large 
part  of  the  balance  of  capital-resources;  under  ordi- 


DANGERS   IN  PRESENT   EQUIPMENT  133 

nary  circumstances  these  last  mentioned  investments 

(loans  to  other  banks)  are  available  resources  for  the 

support  of  credit-accounts,  but  as  a 
Banking'  equip-      r  r  •  i.  i.i         i  i 

ment  before  1893  ^^^  ^f  equipment  they  have  always 

shown  weakness  at  the  very  time  when 
strength  is  required.  In  many  instances,  however, 
the  loans  to  other  banks  have  not  accounted  for  the 
entire  balance ;  at  such  times  as  this  discrepancy  has 
appeared,  it  is  evident  that  the  banks  have  used  a 
portion  of  their  capital  for  direct  purchase  of  "com- 
mercial assets"  instead  of  procuring  them  by  ex- 
change of  credit-accounts.  From  inquiry  as  to  prac- 
tice of  individual  banks  it  is  found  that  many  of 
them  have  been  guilty  of  investing  a  portion  of  their 
capital  in  loans  to  customers,  relying  specifically  on 
their  '^ commercial  assets"  to  support  their  "credit- 
accounts."  Such  a  practice  is  prima  jade  evidence 
of  an  extension  of  credit  which  may  at  any  time  cause 
the  banks  suddenly  to  reduce  the  credit-funds  in  the 
community  to  protect  themselves  from  loss.  To  the 
public  the  result  is  the  same  as  if  no  capital  whatever 
had  been  invested  in  the  banking  business. 

Since  1893  the  showing  has  been  quite  a  different 
one;  increasing  proportions  of  capital-funds  have 
been  used  to  purchase  securities.  Had  these  invest- 
ments been  readily  convertible  into  cash  when  money 
was  needed,  the  banks  would  have  been  in  a  much 
stronger  position  to-day  than  they  were  in  before 
1893.     The  fact  is,  however,  as  hereinafter  shown. 


134       THE  BANK  AND  THE  TREASURY 

that  owing  to  the  large  interest  of  the  banks  in  "call 
loans"  secured  by  collaterals,  these  investments, 
Character  of  cap-  ^^^^^^^  securities,  etc.,  owned  have 
Hal  investments  not  been  immediately  convertible  hy 
since  I  93  ^^j^^.  ^^^y  ^f  them  are  not  even  con- 

vertible hy  hypothecation  in  time  of  extraordinary 
money-demand.  Among  these  may  be  placed  secu- 
rities which  have  been  underwritten,  for  the  reason 
that  if  they  were  marketable  they  would  not  be  "on 
hand."  The  effect  of  investment  of  capital-funds 
in  "stocks,  securities,  etc.,"  in  many  instances  has 
been  that  such  investment  has  come  to  be  an  added 
burden  on  banking  equipment,  instead  of  being  an 
increased  support  to  commercial  credit-demands, 
and  a  primary  cause  for  increasing  credit  disturbance 
by  increasing  the  expansion  and  contraction  of  credit- 
funds.  Since  1893  credit  disturbances  and  inability 
of  bank-credit  to  meet  demands  have  increased,  until 
"inelasticity"  has  become  the  most  important  prob- 
lem in  American  finance. 

Banking  Equipment  Purchased  on  Credit 

Within  the  last  ten  years  there  has  been  a  gradual 
increase  in  the  proportion  of  "money-reserves"  to 
Inadequacy  0}  Capital.  The  "money-reserves"  have 
proprietary  grown  until  for  some  time  they  have 

^^i^^  been  in  amount  about  equal  to  the 

"share-capital"  (not  including  "surplus "and  "undi- 
vided profits") employed  by  National  banks;  and  the 


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DANGERS   IN  PRESENT  EQUIPMENT  135 

amount  of  "money-reserves"  plus  "unencumbered 
securities"  has  come  to  be  larger  than  the  combined 
total  of  "share-capital"  and  "surplus."     This  situa- 
tion, however,  has  not  been  associated  with  an  in- 
crease in  "money-reserves"  proportionate  to  credit- 
liabilities,  but  with  a  decrease  in  capitalization.     If 
we  consider  the  loans  to  reserve  agents  as  a  part  of 
redemption  equipment,  then  the  equipment  of  Na- 
tional banks  for  the  support  of  credit-accounts  far 
exceeds  the  proprietary  capital  provision  made  for 
its  purchase  —  an  anomalous  position ;  a  situation  to 
be  explained  only  by  the  assumption  that  a  part  of 
the  banking  equipment  had  been  purchased  on  credit. 
From  a  point  of  view  of  the  proportion  of  banking 
equipment  represented  as  being  available,  the  banks 
are  in  a  much  stronger  position  than  they  were  before 
1893,  but  this  representation  is  without  consideration 
of  the  adaptability  of  equipment  to  the  purpose  for 
which  it  is  provided  and  used.     As  a  matter  of  public 
concern,  equipment  is  for  the  purpose  of  supporting 
the  credit-accounts  without  contracting  loans,  and  it  is 
with  reference  to  these  that  its  strength  must  be 
measured.     Capitalization  must  be  considered  simply 
as  the  means  by  which  the  equipment  is  to  be  pro- 
cured.    Judged  from  this  standard,  the  capital  is 
inadequate  to  provide  equipment  used;  and  equip- 
ment used  being  procured  on  credit  and  weakened 
by  this  character  of  charge  is  inadequate  to  support 
banking  demands. 


136  THE   BANK  AND   THE  TREASURY 

As  before  shown,  the  operation  of  the  legal  reserve 
clause  of  the  National  Bank  Act  has  been  to  prevent 
a  decrease  in  the  amount  of  money  held  below  a 
point  necessary  to  meet  ordinary  current  needs;  but 
at  the  same  time  the  credit  load  which  the  banks  have 
attempted  to  carry  has  been  multiplied  until  within 
the  last  ten  years  the  proportion  of  total  capital-re- 
sources to  demand  obligations  has  been  materially 
lessened.  Proportionate  to  the  credit  load  to  be 
supported,  therefore,  banking  equipment  has  been 
weakened  not  only  with  reference  to  its  quantity  but 
also  with  reference  to  its  quality.  The  increase  in 
Increase  in  money-reserves  has  been  due  to  an  in- 

ZTu>'lncZZd  crease  in  relative  weakness  of  total 
credit  weakness  banking  equipment  through  an  in- 
crease of  credit-accounts  outstanding.  The  equip- 
ment now  used  to  support  outstanding  demand- 
credits  is  not  only  relatively  weaker,  but  a  large  part 
of  it,  instead  of  being  provided  by  means  of  capitali- 
zation, has  been  purchased  or  provided  by  means  of 
the  very  current-accounts  (the  demand-credit)  which 
the  equipment  so  purchased  was  intended  to  support. 

Methods  Employed  to  Increase  Equipment  ivithout 
Increasing  Capitalization 

Under  a  banking  law  which  allows  banks  to  pay 
interest  on  "deposits"  of  (loans  from)  other  banks, 
—  a  law  which  permits  the  depositing  (loaning)  bank 
to  count  the  loan  a  part  of  its  cash  —  a  premium  is 


DANGERS   IN  PRESENT  EQUIPMENT  V37 

placed  on  an  inferior  kind  of  redemption  equipment, 
and  a  practice  has  grown  up  which  in  many  instances 
has  destroyed  the  equipment  character  of  the  loan. 
On  September  9,  1903,  there  were  approximately 
$395,000,000  of  these  loans.  Several  points  of  weak- 
ness of  the"  loan  to  reserve  agents"  have  already  been 

The" loading'' of  ^^^^^^^^  ^^-  ^  practice  which  com- 
"  accounts  with  pletely  thwarts  the  purpose  of  the  Act 
reserve  agents''     ^^^^    ^^^^^^^   ^^^    "  reserve-account " 

wholly  unavailable  is  known  as  "loading"  balances 
or  "mutual  balances."  Bank  A  deposits  with  (loans 
to)  bank  B  (its  reserve  agent)  $100,000.  Bank  B 
loans  to  bank  C  $100,000.  Bank  C  loans  to  bank  A 
$100,000.  Under  our  present  system  of  reporting, 
by  such  a  series  of  transactions  bank  A  having 
$100,000  in  cash  may  count  it  as  $200,000.  If,  how- 
ever, bank  A  were  required  to  send  in  a  report  on 
some  such  classified  form  as  that  hereinbefore  sug- 
gested, -every  transaction  of  this  kind  would  a])pear 
on  the  balance-sheet  as  well  as  in  the  private  instruc- 
tions to  the  Comptroller. 

The  method  of  purchase  of  commercial  assets  de- 
scribed by  Mr.  Vanderlip  has  also  been  employed  for 
procuring  the  capital  equipment  used  to  support  com- 
mercial credit-funds.  A  corporation 
chase  of  securities  wishing  to  float  an  issue,  obtains  an 
underwriting;  or  by  some  method  it 
may  get  a  quotation  on  the  Street  or  on  the  Exchange. 
These  issues,  if  underwritten  by  the  bank,  to  the 


188  THE  BANK  AND  THE  TREASURY 

extent  that  advances  are  made  on  this  account,  are 
considered  as  "stocks,  securities,  etc." 

If  not  underwritten  by  the  bank  they  may  be  used 
by  the  broker  as  collaterals  for  procuring  increased 
loans;  if  the  broker  cannot  obtain  a  loan  on  this  sort 
of  collateral  at  reasonable  margins  and  interest,  other 
securities  may  be  substituted,  and  the  broker  may 
carry  the  new  flotation  against  his  own  capital  until 
the  new  issues  are  disposed  of  to  the  public.  For  the 
purpose  of  buying  these  increased  loans  to  which  the 
The  credit  ptir-  securities  stand  as  collateral,  the  bank 
chase  of  "  money-  uses  its  own  increased  credit-accounts, 
reserves  which  in  turn  are  used  by  customers 

as  cash  to  buy  other  securities.  As  the  public  grad- 
ually absorbs  the  securities  offered,  the  banks  are 
able  to  absorb  larger  volumes  of  money  through 
.  voluntary  payments  made  on  loans,  without  increas- 
ing capital. 

This  process  of  "loading"  and  of  credit  acquisition 
of  equipment  reserves  may  continue  so  long  as  credit 
inflation  continues  and  the  money  supply  of  the 
country  is  increased  by  a  favorable  balance  of  foreign 
exchange  on  sales  of  goods;  or  the  same  result  may 
be  accomplished  by  decreased  demand  for  legal- 
tender  money  to  be  used  as  "current  cash"  in  the 
community. 

At  last  the  tables  turn.  There  is  an  increase  in  the 
demand  for  money  in  outstanding  accounts.  The 
balance  of  foreign  exchange,  on  account  of  goods, 


DANGERS   IN  PRESENT  EQUIPMENT  139 

grows  less;  with  the  increase  of  business  activity  the 
demand  for  money,  for  ''till  cash"  and  "change" 
increases;  and  again,  the  demand  for  money  may  be 
still  further  increased  by  the  decreased  use  of  bank- 
credit-accounts,  due  to  doubt  as  to  the  ability  of  the 
The  inherent  banks  to  meet  their  customers'  ac- 
■weakness  in  such  counts  outstanding.  At  the  same  time 
practices  there  is  a  corresponding  decrease  in  the 

demand  for  securities.  The  public  no  longer  con- 
tinues to  absorb  stock  and  bond  flotations  offered  by 
speculators  and  promoters,  and  the  brokers  are  forced 
to  carry  increasing  quantities  of  undigestible  securities 
against  their  own  capital .  With  falling  prices  of  secur- 
ities, the  banks  inaugurate  a  process  of  liquidation  of 
the  loans,  which  in  turn,  not  only  wipes  out  margins, 
but  also,  on  occasion,  when  the  shrinkage  in  prices 
and  in  available  assets  of  speculative  customers  has 
been  too  rapid,  forces  the  bank  to  take  securities  in 
satisfaction  of  loans.  These  securities  so  taken  are 
also  added  to  their  holdings  of ''  stocks,  securities,  etc." 
The  upshot  of  such  practice  is  this:  (i)  That  while 
money-reserves  may  be  temporarily  maintained  to 
meet  the  provisions  of  law  without  curtailing  com- 
mercial accommodation,  market  con- 
The  public  con-      ,.^.  ,  .  ,        n     i     i^  ^  i   ^^ 

cerned  ditions  which  call  a  halt  to  speculation 

place  the  banks  in  a  position  which 
forces  liquidation  of  loans  to  maintain  these 
"money-reserves";  (2)  the  current-accounts  expand 
beyond  a  safe  proportion  to  total  resources  purchased 


I  to       THE  BANK  AND  THE  TREASURY 

by  means  of  invested  capital;  (3)  the  capital-invest- 
ments themselves  become  impaired  in  quality  and 
are  not  readily  convertible;  (4)  a  part  of  the  capital 
of  the  banks  which  should  be  used  in  the  business  is 
diverted  to  underwriting  and  speculative  ventures; 
and  (5)  in  time  of  credit  contraction  (the  burden  of 
procuring  money  as  a  means  of  meeting  demands  in 
the  credit-accounts  used  by  the  banks  to  purchase 
income-bearing  assets  being  forced  on  the  commercial 
and  industrial  community)  all  profitable  business 
suffers  for  lack  of  current  funds. 

From  the  practice  of  National  banks  during  the 
last  ten  years,  some  other  interesting  conclusions  may 
be  drawn.  In  the  first  place,  it  is  evident  that  elas- 
ticity requires  some  sort  of  protection  against  the 
expansion  of  bank-credit  beyond  the  margin  of  safety 
to  available  capital  equipment  provided  by  the  bank 
for  its  support.  In  the  second  place,  the  conclusion 
before  drawn  seems  beyond  question,  viz.,  that  if 
banks  are  to  give  support  to  underwriting  and  to 
margin  speculation,  such  capital  equipment  as  is 
used  to  this  end  should  be  clearly  distinguished  from 
the  equipment  used  in  the  commercial  banking  busi- 
ness.    In  the  third  place,  the  conclusion  would  seem 

beyond  controversy,  that  when  a  bank 

Inherent  dan-        •      -.  •  •.  •  i      j     •* 

m  its  various  capacities  overloads  its 

capital  support,  or  permits  itself  to 

extend  its  credit  beyond  a  point  of  safety,  the  only 

way  the  credit  relations  of  a  community  may  be 


DANGERS   IN   PRESENT   EQUIPMENT  141 

maintained  and  brought  within  lines  of  safety  with- 
out contracting  commercial  accommodation,  and 
forcing  a  reduction  in  current  credit-funds,  is  by 
enlisting  the  support  of  new  and  increased  capital  — 
a  banking  capital  large  enough  not  only  to  support 
its  regular  commercial  business  with  safety,  but  also 
to  provide  the  funds  necessary  to  carry  on  the  various 
underwriting  and  speculative  enterprises  through 
which  the  banks  are  forced  into  a  position  of  contrib- 
uting capital  for  the  permanent  equipment  of  new 
promotions. 

The  Increasing  Weakness  of  Banks  in  Periods  of 

Credit  Expansion  or  So-Called  Periods  of 

Prosperity 

To  illustrate  the  need  for  a  correlation  of  both 
"money-reserve"  and  "reserve-capital  investments" 
(or  total  redemption  equipment)  to  credit-accounts 
outstanding,  the  exhibit  on  Chart  XIII  is  referred 
to.  Taking  the  record  of  the  last  forty  years  it 
would  be  shown  that  periods  of  credit  strain  have 
been  periods  of  relatively  low  capitalization  and  over- 
taxed equipment.  These  also  have  been  periods  in 
which  demands  for  greater  elasticity  have  been 
Failure  in  the  heard.  It  is  also  quite  as  apparent 
past  to  coordinate  ^^^^  ^^^^^  ^^^  ^^^^  ^^  ^^^^  increasing 
credit  support  ^  ...  . 

with  credit  strain  ratio  of  credit  obligations  to  capital 

equipment.  Assuming  the  most  favorable  hypoth- 
esis possible  —  that  the  whole  capital  of  the  banks 


142  THE   BANK   AND   THE   TREASURY 

has  been  properly  invested  in  resources  which  may  be 
used  to  support  accounts  outstanding  —  no  other  evi- 
dence is  needed  of  over-issue  of  credit-accounts  or  over- 
sale of  "deposit"  obligations  on  the  part  of  the  banks. 
Periods  of  speculation  have  carried  credit-accounts 
out  of  all  safe  proportion  to  capital  invested  as  a 
means  of  providing  equipment  for  the  business.  As 
a  result,  when  money-demands  on  exchange-balances 
have  increased,  the  banks  have  been  forced  to  curtail 
loans  to  customers  to  procure  the  money  necessary 
to  make  payments  to  other  banks.  Periods  of  de- 
pression and  of  financial  reorganization  have  followed 
so-called  periods  of  prosperity  and  credit  expansion ; 
so-called  periods  of  depression  have  been  seasons  of 
readjustment  of  current  credit  to  capitalization.  If 
we  reduce  this  experience  during  the  last  period  of 
prosperity  to  a  base  of  percentages,  a  tabulation  of 
results  would  be  as  follows: 

Per  cent  of  Per  cent  of 

Y^  Capitalization  Vptt  Capitalization 

^  ^^  to  Customers-  *  ^^^  to  Customers- 

Accounts  Sold  Accounts  Sold 

1S96  56      iqoo  35 

1897  49      1901  31 

1898  42      1902  32 

1899  33  1903  36 

Again  engaging  the  most  favorable  assumption 
(that,  during  this  period,  all  of  the  capitalization  of 
the  National  banks  was  invested  in  the  best  of  bank- 
ing equipment,  and  that  during  all  this  period  there 
was  no  weakness  in  the  character  of  capital-resources 
held),  the  showing  is  an  interesting  one.     From  the 


DANGERS   IN   PRESENT   EQUIPMENT  143 

foregoing  it  will  appear  that  in  1896  the  capitalization 
(share  capital  and  surplus)  was  fifty-six  per  cent  of 
Increasing  weak-  ^^c  amount  of  credit-accounts  (de- 
ness  in  periods  oj  posits)  sold  to  customers.  From  1896 
prespen  y  ^^  1901,  or  the  period  of  credit  expan- 

sion, the  banks  had  so  far  increased  the  proportion  of 
the  demand-credit  obligations  sold  to  customers  that 
they  had  reduced  their  capital  equipment  to  thirty- 
one  per  cent.  Since  that  time  they  have  been  forcing 
an  adjustment  by  process  of  gradual  liquidation,  and 
in  1903  they  had  increased  the  ratio  of  capitalization 
to  thirty-six  per  cent,  as  a  means  of  protecting  them- 
selves against  the  folly  of  oversale  of  credit-accounts 
to  customers. 

The  disturbance  which  was  caused  to  business  was 
well-nigh  equal  to  that  caused  by  the  issue  of  green- 
backs during  the  Civil  War;  during  the  two  years  of 
liquidation  the  loss  sustained  to  securities  (by  parties 
The  credit  dis-  on  which  these  documentary  proper- 
turbance  equal  to  ^-^^  j^^^  ^^^^  unloaded  in  times  of 
that  of  the  green- 
back inflation       so-called    prosperity)    was    quite    as 

great  as  the  cost  of  carrying  on  the  greatest  military 
campaign  in  history.  And  it  is  not  certain  that  the 
lesson  has  yet  been  learned;  for  we  find  that  imme- 
diately following  a  long  period  of  forced  liquidation 
at  the  opening  of  the  year  1 904,  when  money  and  credit- 
demands  had  suddenly  grown  less,  the  New  York 
banks  alone,  in  three  weeks,  again  increased  their 
sales  of  credit-accounts  (deposits)  over  $42,000,000. 


144  THE   BANK   AND  THE   TREASURY 

This  operated  on  business  in  the  same  manner  as 
if  there  had  been  a  sudden  increase  in  the  money 
circulation  of  like  amount.  The  press  again  con- 
gratulated the  public  on  a  business  revival.  Little 
thought  was  given  to  a  possible  day  of  reckoning. 

The  experience  of  the  last  forty  years  of  National 
banking  (and  the  same  experience  might  be  shown 
in  State  and  private  banks)  suggests  that  some  limit 
should  be  placed  on  bank-credit  issues  (deposits) 
other  than  that  found  in  the  "legal  money-  reserve"; 
that  "reserve-capital  investments" 
needed  ^'^  ^  should  be  considered  as  well  as 
money-reserves;  that,  while  the  Comp- 
troller may  properly  interest  himself  in  the  money 
equipment  of  a  bank  as  a  safeguard  to  credit,  he 
should  also  have  the  power  to  call  a  halt  on  increasing 
credit-issue  beyond  a  safe  proportion  to  total  un- 
impaired redemption  equipment  —  i.e.,  the  total  cash 
and  assets  readily  convertible  into  cash  without  calling 
in  commercial  loans. 

Federal  authorities  should  be  given  such  powers 
that  they  might  force  the  stockholders  of  a  bank  to 
increase  its  capitalization  when  it  attempts  to  handle 
a  volume  of  business  disproportionate  to  its  capital- 
Should  be  regit-  ized  equipment  —  i.e.,  to  force  the 
lated  by  federal  banks  to  discontinue  the  practice  of 
authority  issuing   credit   beyond   the   point  of 

safety.  Such  legislative  and  administrative  control 
over  our  credit  institutions  is  just  as  imperative  as 


DANGERS   IN   PRESENT  EQUIPMENT  14r> 

that  directed  toward  the  liniitation  of  credit-money 
strain  on  the  gold-reserve  of  the  Treasury,  the  Hmi- 
tation  of  strain  on  the  structure  of  bridges  or  the 
equipment  of  mines,  or  the  enactment  of  legislation 
for  safety  of  buildings  devoted  to  manufacturing,  etc. 
It  should  be  recognized  that  the  credit  equipment, 
when  overstrained,  is  hazardous,  not  alone  to  those 
immediately  involved,  but  also  to  the  business  in- 
terests of  the  entire  nation. 


Chapter  XI 

WHY    THE    "unencumbered    SECURITIES"    OF 

NATIONAL  BANKS   ARE   NOT  READILY 

CONVERTIBLE  INTO   CASH 

It  has  been  assumed  that,  under  our  present  bank- 
ing system,  "unencumbered  securities"  are  the  most 
available  of  the  capital  assets  or  redemption  equip- 
ment to  meet  money-demands  in  time  of  strain 
without  curtailing  commercial  accommodations.  At 
the  risk  of  tedium,  the  reasons  for  this  conclusion 
will  be  retold:  (i)  That  commercial  paper,  whether 
purchased  by  means  of  capital  or  on  credit-account 
may  not  be  converted  into  cash,  except  in  so  far  as 
it  may  be  voluntarily  paid,  without  impairing  the 
elasticity  of  credit  accommodations,  for  the  purpose 
of  obtaining  money  to  meet  demands  on  credit-ac- 
Points  of  superi-  counts  without  contraction ;  therefore, 

ortty  0}  unen-  ^^^^^  must  be  considered  as  "contin- 
cnmbered  secur- 
ities" gent."  (2)  The  effect  of  forcing  pay- 
ment of  loans  to  (amounts  due  from)  reserve  agents, 
at  times,  is  to  curtail  banking  accommodations  of  the 
reserve  banks  and  therefore  to  impair  the  elasticity 
of  "customers-accounts  "  in  the  reserve  cities  —  i.e., 
to  cause  contraction  instead  of  allowing  expansion  of 

[146] 


WHY   SECURITIES  ARE  NOT  CONVERTIBLE      147 

this  form  of  current  funds.  (3)  The  securities  de- 
posited " for  circulation "  and  ''for  deposits"  of  Gov- 
ernment cannot  be  utilized.  When  the  cash-reserves 
are  threatened,  the  only  class  of  assets  of  considerable 
amount  remaining  that  is  readily  available,  and  which 
will  make  possible  the  expansion  of  credit-accounts 
when  expansion  is  demanded,  is  "unencumbered 
securities." 

The  Use  of  Banking  Capital  for  Outlays  in 
Unavailable  Assets 

With  the  exercise  of  good  banking  judgment,  "un- 
encumbered securities"  might  be  utilized  to  obtain 
new  supplies  of  cash  to  support  the  "money-reserve." 
Assuming  that  the  assets  of  this  class  held  by  banks 
are  "available,"  our  commercial-credit  institutions 
are  in  a  stronger  position  to-day  and  may  give  greater 
elasticity  to  their  credit-accounts  than  ever  before. 
This  delectable  conclusion  might  be  admitted,  were 
it  not  for  two  trite  facts:  (i)  that  during  the  two  years 
following  September,  1902,  the  banks  were  hard 
pressed  for  money  and  the  business  community 
suffered  enormous  liquidation  on  account  of  "inelas- 
Investmentin  ticity"  of  bank-credit;  (2)  that  the 
unavailable  se-  banks  during  this  time  did  not  to  any 
ainties  ^^^^^   extent,    indeed,    throughout   a 

long  banking  experience,  they  have  not  taken  any 
considerable  portion  of  securities  to  market  and  sold 
them  for  cash  to  relieve  sudden  pressure.     The  un- 


148  THE  BANK  AND  THE   TREASURY 

encumbered  securities  held  have  been  constantly 
increasing;  the  amount  held  by  the  National  banks 
has  during  the  last  thirty  years  increased  from  a 
small  holding  to  about  $500,000,000.  The  increase  has 
been  gradual,  almost  without  a  break  in  the  line  (see 
opposite  page  244),  yet  the  banks  have  not  to  similar 
extent  utilized  securities  to  meet  money-demands  or 
to  support  money-reserves;  they  have  not  by  sale 
converted  them  into  cash.  On  the  contrary,  they 
have,  on  numerous  occasions,  in  time  of  financial 
peril,  increased  their  holdings  of  securities,  and 
thereby  increased  the  weight  of  liquidation  which 
has  been  thrown  on  assets  acquired  by  means  of  their 
own  demand  liabilities. 

Now  the  question  may  fairly  be  raised  —  Why  is  it 
that  so  large  a  part  of  the  capital-assets  of  banks 
has  not  been  used  to  obtain  money  to  protect  de- 
mands for  money  made  on  their  credit-accounts ;  why 
has  the  principle  of  elasticity  of  accounts  been  sacri- 
ficed, when  unencumbered  assets  were  at  hand  to 
The  principle  0}  support  the  credit  of  institutions 
elasticity  sacri-  whose  business  it  is  to  purchase  com- 
'^^^  mercial  paper  "on  account"  and  to 

provide  current  funds  to  the  community  when 
needed?  By  referring  to  the  chart  (page  244),  it 
will  be  seen  that  "commercial  assets"  and  not  "se- 
curities" have  responded  to  money-demands.  The 
fact  stands  out  boldly  that  the  customer  has  been 
sacrificed  and  that  business  accommodations  have 


WHY   SECURITIES   ARE   NOT  CONVERTIBLE       149 

been  neglected;  good  commercial  paper  has  been 
turned  away  and  good  loans  have  been  called  or 
reduced  to  protect  capital-investments  in  the  form 
of  securities  owned.  It  is  in  this  fact  and  in  this 
situation  that  we  must  look  for  much  of  the  practice 
that  has  stood  in  the  way  of  "elasticity." 

If  we  ask  a  banker  why  he  does  not  sell  his  stocks 
and  other  unencumbered  securities  for  cash  with 
which  to  protect  his  customers-accounts  without 
curtailing  loans,  he  will  say  that  under  the  existing 
system  and  practice  he  cannot  do  so  without  loss  to 
Why  the  banker  ^^e  capital-resources  of  his  institution. 
does  not  sell  The  practical  business  problem  is, 
securities  therefore:    Shall   the   bank   suffer   a 

capital  loss  in  its  efforts  to  obtain  money  with  which 
to  make  good  its  accounts,  or  shall  the  public  suffer 
from  inelasticity  of  bank-credit?  In  such  an  emer- 
gency, there  is  only  one  way  that  a  faithful  bank 
officer  can  answer  such  a  question:  The  burden  of 
loss  must  be  shifted,  if  possible,  and  forced  liquida- 
tion is  the  result.  A  better  solution  would  have  been 
not  to  have  allowed  the  bank  to  get  into  such  a 
situation.  But  for  this  the  banker  is  not  entirely  at 
fault;  this  has  not  come  from  any  disposition  on  his 
part  to  curtail  accommodations  nor  to  deprive  his 
customer  of  needed  funds.  The  trouble  has  been 
in  the  kind  of  competition  that  he  has  been  forced  to 
meet  and  in  the  system  which  he  is  employed  to 
operate. 


150  THE  BANK  AND   THE  TREASURY 

An  explanation  which  has  been  offered  to  account 
for  the  relatively  unvarying  amount  of  securities  re- 
ported by  banks  is,  that  these  securities  are  used  as 
collateral  security  for  "bills  payable"  and  "other 
liabilities"  such  as  temporary  loans  from  other  finan- 
cial institutions.  While  there  is  considerable  of 
fluctuation  in  "bills  payable"  and  "other  liabilities," 
and  these  fluctuations  respond  in  a  measure  to  periods 
The  claim  that  of  extraordinary  money-demand,  they 
they  are  used  for  do  not  account  for  more  than  a  small 
collateral  ^^^^  ^^  ^^^  evident  "  inconvertibility." 

A  better  reason  why  "unencumbered  securities" 
have  not  been  "convertible  into  cash  in  time  of 
panic,"  as  a  means  of  support  to  "money-reserves," 
seems  to  be  in  an  interpretation  of  the  statistical 
exhibits  of  the  annual  reports  of  the  Comptroller. 
The  increase  in  "Stocks  and  Other  Securities" 
owned  by  National  banks  during  the  five  years  1898- 
1902,  inclusive,  is  given  as  follows:  1898,  $255,000,- 
000;  1899,  $320,400,000;  1900,  $367,300,000;  1901, 
$448,600,000;  1902,  ^493,100,000. 

The  Character  of  Securities  Held  by  Banks 

The  securities  owned  have  been  an  increasing  "un- 
encumbered asset."  The  power  of  one  to  convert 
property  into  money  depends  on  a  market;  the  gain 
or  loss  depends  on  the  price  obtained  as  compared 
with  cost;  the  price  obtainable  depends  on  the  pur- 
chasing demand  at  the  time  the  offer  is  made.     This 


WHY  SECURITIES  ARE  NOT  CONVERTIBLE      151 

takes  us  into  a  more  general  banking  situation.  The 
National  bank  is  only  one  of  four  classes  of  institu- 
tions pressed  for  money  at  the  same  time  and  having 
the  same  kind  of  securities  for  sale.  It  must  enter  a 
market  in  which  State  banks,  private  banks,  and  the 
trust  companies,  —  besides,  on  occasion,  in  a  smaller 
way,  the  savings  banks,  —  are  also  buying  and  selling. 
If  we  take  into  account  the  holdings  of  similar  unen- 
cumbered securities  by  these  institutions  for  five 
years  they  appear  as  follows: 


Railroad  Securities 

(Amounts  in  Millions) 

1898             1899  1900  1901              1902 

State  banks $.6           $.2  $.3  $2.4           $^.;^ 

Private  banks .7                .3  .5  i  .3                .7 

Trust  companies 14.6           12.5  10.4  22.0           18.0 

Totals $15.9         $13.0  $11.2  $25.7         $22.0 

Banks,  Stocks,  etc. 
(Amounts  in  Millions) 

1898        1899  1900  19OI         Tt)02 

State  banks $2.6           $2.2  $.4  $.1           $.2 

Private  banks .3               .3  .4  .4               .4 

Trust  companies .9             i .2  .2  3.2             2.6 

Totals $3.8           $3.7  $1 .0  $3.7           $3.2 

Industrial  and  other  Securities  —  not  including  United  States  and 
Municipal  Bonds 

(Amounts  in  Millions) 

1898            1899  1900  1901            1902 

State  banks $121.5       $160.7       $179-6  $228.5       $267.1 

Private  banks 2.1              2.0  2.4  4.1              3.2 

Trust  companies 137-8         216.4  305.9  35^-5         412.8 

Totals $261.4       $379.1       $487.9  $591.1       $683.1 


U2       THE  BANK  AND  THE  TREASURY 

Total  Securities  Owned  by  State  Banks,  Private  Banks  and  Trust 

Companies 

(Amounts  in  Millions) 

1898  iSgt)  1900  1901  1902 

Railroad  securities $15.9  $13.0  $11.2  $25.7  $22.0 

Bank  securities 3.8             3.7  i  .0  3.7             3.2 

Industrials,  etc 261.4  379-1  487.9  591 -i  683.1 

Totals $281.1       $395.8       $500.1       $620.5       $708.3 

Total  Stocks  and  other  Securities  Owned  by  Commercial  Banks 

(Amounts  in  Millions) 

1898  1899  1900  1901  1902 

National  banks $255.2     $320.4     $367.3     $448.6       $493.1 

Other  commercial  banks,  etc.     281. i       395-8       500.1       620.5         7°^.3 

Totals $536.3     $716.2     $867.4  $1069.1     $1201.4 


The  foregoing  exhibits  show  that  in  State  banks, 
in  private  banks,  and  in  trust  companies,  there  has 
been  a  remarkable  increase  in  securities  held,  and 
that  nearly  the  whole  amount  has  been  in  stocks 
and  bonds  other  than  "Railroads,"  "Banks,"  or 
"Municipals"  (for  municipals  are  not  represented 
here).  The  increase  has  been  largely  in  those  secu- 
rities known  as  "Industrials,  etc."  We  also  know 
that  many  of  these  institutions  have  been  active  in 
underwriting  industrial  and  other  current  issues;  in 

so  far  as  these  are  represented  they 
^Ms^'etc^  "'^^^  still  in  the  form  of  "undigested 

securities."  We  have  no  sufficient 
data  for  the  closer  classification  of  "stocks  and  other 
securities"  owned  by  National  banks,  but  it  may 
fairly  be  assumed  that  they  have  been  somewhat 
similarly  involved  in  the  practice  that  has  been  so 


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WHY   SECURITIES  ARE   NOT  CONVERTIBLE       153 

prevalent  with  private  banks,  State  banks,  and  trust 
companies.  In  this  practice,  which  ties  up  the  capi- 
tal of  banks  in  securities  which  are  not  readily  ac- 
ceptable as  collateral,  and  in  the  efforts  of  the  banks 
to  prevent  investment  loss  in  forced  sales,  may  be 
found  sufficient  reason  for  the  present  "inconvert- 
ibility of  securities." 

The  Effect  of  Call- Loans  on  the  Use  of  Unencumbered 
Securities  as  Redemption  Equipment 

The  uncomfortable  financial  gastritis  caused  by 
"undigested"  industrials,  however,  will  not  explain 
the  persistence  of  similar  conditions  of  inconverti- 
bility extending  back  thirty  or  forty  years.  For 
explanation  of  this  another  market  situation  may  be 
appealed  to.  From  the  report  of  the  Comptroller  it 
appears  that  at  the  time  of  greatest  liquidations, 
September,  1902,  these  various  banks  were  holding 
collaterally  secured  loans  to  the  amount  of  $2,146,- 
6oo,ooo,to  which,  if  we  add  a  twenty  per  cent  margin 
as  a  basis  for  estimate  of  the  stocks  held  in  trust, 
would  make  an  aggregate  of  $2,575,900,000  of  secu- 
rities, to  the  sale  of  which  they  look  for  the  payment 
of  loans.  In  this  situation  may  be  found  a  contin- 
uing or  persistent  forre  —  a  reason  in  self-preserva- 
tion—  for  the  inconvertibility  of  securities  owned. 
To  attempt  to  sell  their  own  holdings  of  $1,201,400,- 
000  in  time  of  financial  strain  would  threaten  the 
market  for  more  than  twice  that  amount  of  collateral 


154       THE  BANK  AND  THE  TREASURY 

security,  on  the  sale  of  which  loans  depend  for  pay- 
ment. The  loss  from  sudden  conversion  of  "  stocks" 
owned,  therefore,  would  be  a  double  one.  It  would 
depreciate  the  properties  owned  by  the  bank  and  at 
the  same  time  would  threaten  loss  on  collateral  loans. 
In  these  circumstances  the  only  solution,  without  loss 
to  the  bank,  is  such  a  careful  handling  as  will  allow 
the  bank  to  obtain  money  desired  without  any  sud- 
den shock  to  the  stock  market. 

The  Need  for  Separate  Capitalization  for 
"Speculation^^  and  "Underwriting^^ 

The  present  and  continuing  practice  of  under- 
writing and  of  loaning  on  collaterals  to  speculators 
gives  the  key  to  the  inability  of  the  banks  to  use  this 
class  of  capital  assets  to  support  their  credit  —  to  the 
inconvertibility  of  "unencumbered  securities."  In- 
stead of  looking  to  stocks  and  bonds  for  investment 
of  "surplus  capital-resources"  and  holding  these  as 
a  means  of  protecting  the  money-reserve  from  deple- 
tion, instead  of  looking  to  these  investments  as  a  part 
of  the  equipment  provided  out  of  capital  to  support 
the  current-accounts  of  customers  (the  stock  in  trade 
of  the  bank)  there  has  ever  been  a  temptation  for 
The  different        banks  to  turn  a  part  of  their  capital- 

financial  charac-  resources  away  from  the  commercial 

ter  of  these  busi-  ^  _  -' 

nesses  banking  business.     In  the  early  part 

of  the  past  century  real-estate  was  the  attraction; 

investment  and  speculation  in  this  came  to  be  so 


WHY  SECURITIES  ARE  NOT  CONVERTIBLE      155 

dangerous  a  practice  as  to  bring  forth  universal  con- 
demnation, which  resulted  in  the  enactment  of  stat- 
utes prohibiting  real-estate  purchases.  Later,  stocks 
and  bond  issues  of  corporations  attracted  the  funds 
of  the  banker.  The  more  recent  practice  has  been 
defended  on  the  ground  that  securities  are  more 
readily  convertible  into  cash.  As  a  matter  of  prac- 
tice, however,  under  our  present  system  of  "reserves" 
and  "call-loans,"  they  are  not  and  never  have  been 
quickly  convertible  assets  when  an  invested  capital 
reserve  is  really  needed  to  support  customers-ac- 
counts. They  have  proved  not  quite  so  dangerous  to 
our  credit  institutions  as  real-estate  investments,  but 
nevertheless  dangerous;  and  the  institution  so  owning 
"securities,"  when  sorely  pressed,  have  done  the  only 
thing  possible  to  do,  viz.,  turned  to  commercial  paper 
assets,  forced  loans,  and  shifted  the  burden  as  far  as 
possible  on  the  community,  rather  than  themselves 
suffer  an  investment  loss  on  forced  sales  of  securities. 
The  principle  that  the  commercial  bank  should 
furnish  funds  for  speculation  without  special  capi- 
talization for  that  purpose  is  a  wrong 
Conclusions  as  ..  i^     •       i     .        •         • 

to  practice  ^ne;  It  results  m  destroymg,  m  part 

at  least,  its  usefulness  as  a  com- 
mercial banking  institution.*  If  marginal  speculation 
is  to  remain  a  prominent  feature  in  financial  circles, 

*To  show  the  disturbing  influence  of  speculation  the  chart  on  page  i6o 
has  been  prepared.  From  this  it  will  be  seen  that  during  the  period  from 
1893  to  1897  the  individual  accounts  (deposits)  and  the  "loans  and  dis- 
counts" of  New  York  banks  followed  along  parallel  lines.     This  was  a 


!.')(>  THE   HANK    AND   TlIK   TREASURY 

institutions  intended  primarily  to  serve  such  a  con- 
stituency shouki  stand  on  their  own  basis  of  capitaH- 
zation,  and  shouUl  have  a  financial  equipment  in  the 
form  of  resources  especially  adapted  to  success  in 
Ihe  rendering  of  such  service.  The  commercial  bank 
which  builds  up  a  "call-loan"  constituency  encour^ 
ages  a  practice  and  a  use  of  banking  capital  which  in 
time  of  strain  not  only  precludes  the  possibility  of 
converting  unencumbered  securities  owned,  but  also 
loads  the  market  with  collateral  loans  and  shuts  the 
door  of  opportunity  for  obtaining  money,  by  sale  or  by 
hypothecation  of  capital-resources  held  in  reserve. 

period  diiriiii:;  wliiili  New  York  banks  were  supporting  a  relatively  small 
volume  of  speculation.  From  1S07  to  ic)o^  the  speculative  acti\Tity  of 
the  metropolis  \\,\s  the  most  conspicuous  feature.  The  disturbance  of 
commercial-credit  relations  is  traced  in  the  erratic  movement  of  the  lines. 
At  times  the  loans  and  discounts  nearly  equal  current  obligations,  .\gain, 
within  a  few  months  there  will  be  a  ilisparity  amovmting  to  several  hun- 
dred millions  of  dollars.  This  siH'culative  result  cannot  be  considered  a 
wholesome  one  for  a  commercial  bank. 


Chapter  XII 

DANGEROUS    ASSOIPTIONS    iLA.DE    EY    THE    GOVTRX- 
MENT    WTTH   RESPECT    TO    CURRENX'Y   AND 
BANKING 

The  failure  on  the  pjart  of  legislators  and  admin- 
istrative officers  to  appreciate  the  distinction  betv.-een 
the  functions  of  the  Treasun.'  as  the  sole  agency  of 
money-issue,  and  the  functions  of  the  commercial 
bank  as  the  sole  agency  for  the  issue  and  redemption 
of  commercial-credit  used  as  current  funds  under  the 
American  financial  system,  has  led  to  legal  provisions 
and  to  practices  which  are  in  large  measure  respon- 
sible for  the  undesirable  condition  of  our  circulating 
FaUure  to  appre-  medium  as  well  as  for  the  present 
ciat€  charact^  oj  inadequacv  of  bank  capitalization  and 
Treasury  issues  ^^demption  equipment.  It  was  not 
until  the  last  decade  that  a  proper  appreciation  was 
had  of  the  pro\'isions  to  be  made  for  the  support  of 
the  credit-moneys  issued  by  the  Treasur}'.  This 
having  been  brought  to  the  attention  of  the  countn.' 
in  1893,  the  same  motives  which  moved  the  people 
to  demand  securit}'  for  State  bank  issues  after  the 
fall  of  the  first  and  second  banks  of  the  United  States, 
the  same  motive  that  sanctioned  the  establishment 

[157] 


158  THE  BANK   AND   THE   TREASURY 

of  an  independent  Treasury,  that  made  the  issues  of 
the  National  Treasury  more  acceptable  in  business 
than  the  mixed  and  uncertain  State  bank  circulation, 
and  that  brought  popular  support  to  the  National 
banking  system,  called  forth  an  expression  favorable 
to  "sound  money"  on  every  occasion  that  the  issue 
has  been  raised. 

The  controversy  of  the  recent  money  campaigns 
was  not  one  as  to  whether  the  Treasury  should  so 
fortify  itself  that  its  issues  or  money  promises  should 
be  immediately  redeemable ;  this  point  was  conceded 
by  both  factions.  The  question  was  as  to  the  stand- 
ard to  be  adopted  as  a  basis  for  issue  and  redemption. 
The  silver  party  urged  that  gold  was  becoming  rela- 
tively scarce,  as  evidenced  by  an  almost  continuous 
fall  in  prices  since  1873,  and  that  the  adoption  of  a 
gold  standard  of  money  and  credit  would  perpetuate 
conditions  unfavorable  to  commerce  and  industry; 

the  gold  party  held  that  the  adminis- 
C  (yfit€fitt(y}t  1)1  trie 
mmey  campaign  ^^ative  attitude   for   the  last   twenty 

years  had  been  to  make  all  contracts 
for  money  payment  gold  obligations,  and  that  a 
change  of  standard  such  as  the  silver  party  urged 
would  cause  financial  disturbances  that  would  be 
ruinous.  The  refusal  of  the  silver  party  to  make  a 
declaration  that  all  past  contracts  should  be  con- 
sidered as  gold  contracts  lent  color  to  accusations  of 
intention  to  dishonor.  But  whatever  may  be  said 
of  the  standard  controversy,  it  must  be  admitted  that 


ASSUMPTIONS  MADE  BY  THE  GOVERNMENT     159 

the  sentiment  for  "sound  money*  —  a  money  every 
dollar  of  which  would  be  redeemed  on  demand  at  par 
in  the  standard  adopted  —  was  practically  unani- 
mous. In  the  elections  which  followed  the  people 
chose  gold  for  the  money  standard,  and  the  subse- 
quent increase  in  gold  production  has  reacted  in 
price  ratios  in  such  manner  as  to  make  this  choice 
acceptable  to  both  parties  and  to  eliminate  the 
"standard"  controversy  from  politics.  The  effect 
of  the  last  few  years  has  been  to  so  fortify  the  Treas- 
ury as  to  enable  it  to  redeem  its  money  obligations  in 
gold  —  in  other  words,  to  make  a  gold  standard 
credit-money  a  sound  one. 

The  recurrence  of  a  period  of  credit  contraction 
and  financial  depression  has  brought  the  other  arm 
of  our  financial  system  under  popular  as  well  as 
official  scrutiny.  As  never  before  the  public  is  be- 
ginning to  realize  that  there  is  something  wrong  with 
institutions  of  commercial-credit.  Animated  by  the 
same  motive  as  in  the  past  —  a  desire  for  soundness 
Faihiretoappre-  i"  the  financial  system  — but  con- 
ciate  the  character  vinced  also  of  the  need  for  a  sort  of 
0}  bank-credit  adjustment  that  will  make  the  system 
capable  of  adapting  itself  to  the  fluctuating  demands 
for  commercial  accommodation,  the  thought  of  the 
people  is  again  turned  toward  financial  reform. 

The  "soundness"  required  of  banks  as  public 
agencies  of  commercial-credit  is  not  only  one  of 
ability  to  pay,  but  ability  to  pay  without  disturbing 


160       THE  BANK  AND  THE  TREASURY 

the  credit  relations  of  the  country.  With  respect  to 
the  banks,  as  well  as  the  Treasury,  it  is  recognized 
A  campaign  lor  ^^'^^^  ^^  ^^e  past  the  Government  failed 
elasticity  in  to  appreciate  its  responsibilities.     It 

^"  has  also  failed  to  grasp  the  problem 

before  it ;  it  has  assumed  an  attitude  that  has  proved 
harmful  —  has  engaged  assumptions  which  must  be 
abandoned  before  a  better  adjustment  can  be  made 
to  American  business  conditions. 

The  Assumption  of  the  Government  that  the  "Cash-'" 

Reserve  is  the  Only  Reserve  Needed  jor 

Credit-Accounts 

The  dangers  inherent  in  the  reserve  practice  have 
been  discussed  in  another  relation.  It  may  also  be 
considered  with  respect  to  the  attitude  of  the  Federal 
Government.  The  first  effect  of  the  assumption  that 
the  "cash "-reserve  is  the  only  guarantee  needed  for 
credit-accounts  was  the  incorporation  of  this  fallacy 
in  the  National  Bank  Act.  It  has  already  been 
pointed  out  that  such  a  legal  requirement  may  be 
complied  with  without  the  use  of  a  bank's  capital  by 
borrowing   money   from   customers   or   from   other 

banks;  it  has  been  further  shown  that 
^a^aZrenJh   ^^e  permission  given  under  the  Bank 

Act  for  a  bank  to  count  its  loans  to 
other  banks  as  "cash"  allows  the  banks  to  inflate 
their  legal  reserves  by  process  of  maintaining  "mu- 
tual balances."     The  lack  of  legal  provision  requir- 


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ASSUMPTIONS   MADE   BY   THE   GOVERNMENT     161 

ing  a  coordination  of  equipment  provided  by  means 
of  capitalization  with  total  "deposits"  or  credit- 
accounts  outstanding  leaves  no  protection  to  the 
customer  and  no  adequate  guarantee  of  such  a  char- 
acter of  soundness  for  commercial-credit-funds  as 
will  protect  the  public. 

Aside  from  the  capital  weakness  induced  by  prac- 
tices thus  encouraged,  another  effect  of  the  provisions 
of  the  Bank  Act,  based  on  this  assumption,  is  to 
leave  the  system  without  possibilities  of  credit  ex- 
pansion when  there  is  a  coincident  increased  demand 
on  the  banks  for  money  —  i.e.,  without  power  to 
adapt  itself  to  the  expanding  and  contracting  de- 
mands for  commercial  accommodation  without  vio- 
lation of  the  ''legal  preserve"  requirement.  Under 
such  a  provision  of  law,  the  money-reserve  itself  is 
Government  con-  ^^^  available  to  meet  demands  on 
irol  of  this  kind  credit  obligations.  And  there  is  no 
forces  inelasticity  ^^^^-^^-^^    j^^de    for   obtaining   more 

money  to  support  new  credit-accounts.  As  a  result, 
when  demands  increase,  accommodations  must  be 
restricted  in  order  to  preserve  the  integrity  of  the 
legal  money-reserve  kept  by  the  bank  to  meet  money- 
demands.  The  Government,  through  its  Depart- 
ment of  Comptrol,  therefore,  having  first  set  up  a 
fund  to  guarantee  the  financial  integrity  of  the  insti- 
tutions issuing  credit,  places  itself  in  the  way  of  the 
bank  using  this  fund  for  the  very  purpose  for  which 
it  was  created.     By  this  attitude  the  Government 


162       THE  BANK  AND  THE  TREASURY 

often  forces  a  bank  to  fall  back  on  its  constituency 
and  force  a  reduction  in  accommodations.  Thus, 
under  the  operation  of  the  assumption  made,  the 
legal  system  of  control  becomes  an  element  of  pri- 
mary disturbance,  and  the  bank,  even  when  finan- 
cially sound,  may  fall  into  the  hands  of  a  receiver, 
thus  adding  still  further  to  the  credit-constrictions 
and  credit-contractions  against  which  complaint  is 
entered. 

Another  result  of  the  Law  requiring  a  minimum 
reserve  to  be  kept,  and  looking  to  this  only  for  pro- 
tection of  accounts,  is  to  limit  the  exercise  of  functions 

of  comptrol  and  prevent  inquiries 
Limits  intelligent      i  •  v  i.-  i  i.        i  i   j         r 

control  which  are  essential  to  a  knowledge  of 

financial  condition.     Before  reform  in 

legislation  can  take  place  there  must  be  a  complete 

abandonment  of  the  "reserve"  principle  which  now 

stands  as  a  fundamental  feature  of  the  Bank  Act. 

An  Assumption  that  the  ^^ Note-Issue''^  is  not  a  Loan 
to  the  Bank  without  Interest 

A  second  assumption  that  has  led  astray  legisla- 
tors and  bankers  is,  that  the  "note-issue"  is  not  a 
Government  loan  to  the  bank  without  interest.     It 

has  before  been  pointed  out  that  the 
ZippoH   '""^'^'^   i^ote  is  obtained  by  the  bank  entering 

into  a  contract  with  the  Government 
for  the  delivery  of  an  amount  of  money  equal  to 
the  amount  of  issues  received,  the  contract  for  pay- 


ASSUMPTIONS  MADE  BY  THE   GOVERNMENT     163 

ment  being  secured  by  United  States  bonds.  It 
has  also  been  observed  that  this  amounts  to  an  ex- 
change of  obhgations  by  which  the  Government 
(through  the  bond  market  thus  created)  receives 
money  for  its  purposes  and  the  banks  obtain  "issues" 
with  which  to  do  business,  a  device  which  ties  up  the 
capital  of  the  bank  and  places  on  it  the  duty  of  first 
redemption  of  the  note.  But  the  weakening  of  the 
capital  support  to  the  banking  business  —  that  sup- 
port available  for  redemption  of  current  credit-obli- 
gations —  is  not  the  only  public  danger  which  lies  in 
the  assumption. 

Viewing  the  bank-note  as  a  money-issue,  the  policy 
of  the  Government  favoring  the  expansion  of  this 
part  of  the  currency  is  directly  opposed  to  its  policy 
restricting  issues  of  Treasury-notes.  Since  the  close 
of  the  Civil  War  there  has  been  a  growing  sentiment 
favoring  the  payment  of  the  outstanding  National 
floating  debt  in  the  form  of  "greenbacks."  Cam- 
paigns for  "sound  money"  have  been  waged  to  re- 
duce demand-credit-obligations  and  to  secure  the 
foundations  of  gold-standard  currency-issues.  One 
Induces  currency  ^^  the  most  threatening  features  of 
disturbances  our  whole  financial  system  has  been 

through  note-issues  ^^^  relatively  large  amount  of  credit- 
money  obligations  proportionate  to  the  reserve  kept 
to  enable  the  Treasury  to  redeem.  The  operation 
of  the  "endless  chain"  through  the  Treasury  in  1893, 
the  shock  to  credit,  private  and  public,  following  the 


164  THE   BANK   AND   THE   TREASURY 

threatened  disappearance  of  the  gold-reserve,  the 
pledges  of  1896,  the  currency  act  of  1900  increasing 
the  reserve  to  $150,000,000,  making  the  reserve  a 
trust  fund  and  securing  it  against  impairment  by 
giving  to  the  Bureau  of  Issues  and  Redemption  a 
first  lien  on  the  current  assets  of  the  General  Treas- 
ury, the  loan  power  placed  in  the  hands  of  the  Treas- 
urer as  a  means  of  giving  force  to  the  instruction  to 
maintain  the  gold  standard  of  credit-money  redemp- 
tion, the  increasing  demands  for  the  retirement  of 
Treasury-notes  and  proposed  legislation  for  making 
silver  subsidiary,  — all  these  acts  and  tendencies  are 
directly  antagonized  by  an  increase  in  bank-note 
issues.  By  the  inflation  of  the  currency  with  paper 
issues  in  the  form  of  collateral  notes  that  may  be 
arbitrarily  injected  into  the  circulation  as  a  matter 
of  high  finance,  gold  and  gold-bearing  obligations  of 
the  Treasury  may  be  supplanted  and  the  money 
system  itself  may  become  unsettled. 

Another  dangerous  feature  of  the  practice  of  note 
inflation  is  in  the  possibility  of  increasing  obligations 
for  gold  payment  (for  the  note  is  ultimately  reduced 
to  this)  without  making  any  additional  provision  for 
gold   redemption-reserves  in   the  banks  or  in  the 

Treasury.  By  law  the  banks  must 
Lessens  s^old  re-  ^i  ^        t  .    j       t       'i. 

serves  P^y  ^^^  notes   if  presented.     In   its 

original  form  the  Law  contained  pro- 
visions for  a  redemption-reserve.  This,  however,  has 
been  repealed  to  further  stimulate  the  investment  of 


ASSUMPTIONS   MADE   BY   THE   GOVERNMENT     165 

bank  capital  in  Government  bonds.  Having  in  it 
possibilities  of  increasing  issues  to  such  a  point  as  to 
drive  gold  out  of  circulation  it  lays  bare  our  credit- 
money  system  at  its  most  vulnerable  point.  The 
danger  is  increased  at  two  particulars:  (i)  The  gold 
supply  may  by  exportation  become  too  small  to 
support  the  credit-issues  of  the  Treasury,  without 
provision  made  for  Government  loans  to  stimulate 
gold  importation;  and  (2)  the  paper-issues  may  be- 
come so  far  expanded  that  the  present  stock  of  gold 
may  be  found  inadequate  even  though  no  exportation 
takes  place. 

That  such  a  result  is  not  beyond  reason  may  ap- 
pear in  the  experience  of  the  last  three  or  four  years. 
Since  the  bond  refunding  acts  and  the  Law  of  1900, 
amending  the  Bank  Act,  this  inflation  of  the  currency 
has  been  marked.  February  4,  1898,  only  $184,106,- 
000  of  National  bank-notes  were  outstanding;  Feb- 
ruary, 1900,  the  amount  had  risen  to  $204,916,000. 
One  year  later  they  had  increased  over  $104,654,000. 
September  9,  1903,  the  amount  of  notes  outstanding 
are  reported  as  $375,037,000,  and  in  July,  1904,  the 
Treasury  reported  over  $449,000,000  of  bank-notes 
in  the  hands  of  banks  and  in  circulation.     And  the 

increase  still  continues.  The  effect  of 
crease  in  hsues     ^he    increase    in    bank-notes   on  the 

money  circulation  is  identically  the 
same  as  an  increase  of  like  amount  in  greenbacks 
would  have  been.     The  greenbacks  and  silver  obli- 


166  THE  BANK  AND  THE  TREASURY 

gations  remaining  about  the  same,  the  bank-note  has 
supplanted  that  much  of  gold,  has  made  unprofitable 
gold  importation,  and  at  times  has  made  profitable 
the  exportation  of  the  standard  metal  when  otherwise 
exportation  would  have  been  unprofitable.  For  ten 
years  we  have  been  devising  ways  and  means  to 
retain  a  larger  amount  of  gold  as  a  foundation  for 
money  and  credit.  Since  1897  we  have  almost 
doubled  our  credit  and  increased  our  money  cir- 
culation nearly  $900,000,000.  At  the  same  time  we 
have,  by  encouraging  an  increase  in  bank-notes,  effec- 
tively barred  the  way  to  gold  importation  until  the 
note  expansion  shall  have  reached  a  point  to  produce 
a  shock  in  credit  relations.  Many  editorials  have 
been  written  in  financial  periodicals  attempting  to 
account  for  the  gold  movement,  but,  strangely  enough, 
the  influence  of  the  bank-note  inflation  has  been  over- 
looked. The  great  public  danger  which  lies  in  the 
assumption  that  a  note-issue  is  not  a  loan  to  the  bank 
without  interest  is  to  be  found  in  the  fact  that  such 
an  assumption  permits  the  bank-note  to  be  made  a 
part  of  the  permanent  money  stock  instead  of  forcing 
upon  it  an  emergency  character  which  will  allow  of 
its  issue  with  profit  only  when  the  money-demand  is 
increased,  and  will  compel  retirement  when  money- 
demands  fall  off. 


ASSUMPTIONS  MADE  BY   THE   GOVERNMENT     1G7 

The  Assumption  that   ^' De posits ^^   by  the  Govern- 
ment are  not  Loans  without  Interest 

The  third  dangerous  assumption  is,  that  so-called 
"deposits"  of  money  by  the  Government  are  not 
loans  to  the  banks  without  interest.  Mr.  Eckels 
pleads  for  treating  the  Government  deposits  in  the 
same  manner  as  customers'  deposits.  He  holds  that 
the  attitude  of  the  Government  requires  security  for 
deposits  is  one  which  tends  to  discredit  the  bank. 
This  conclusion  may  be  conceded  to 
for'deposits  ^^  ^^^  extent  that  the  Government  is  in 
need  of  active  credit-accounts  in  the 
transaction  of  its  business.  The  fact  is,  however, 
that  at  the  time  Mr.  Eckels'  com.ment  was  offered, 
the  Government  had  on  deposit  with  banks  about 
$170,000,000,  whereas  its  current  needs,  or  its  use  for 
credit-accounts  of  banks,  amounted  to  only  from 
$5,000,000  to  $10,000,000  as  represented  in  the  de- 
posits of  disbursing  officers.  The  balance,  some- 
thing over  $160,000,000,  was  an  inactive  account,  and 
was  in  the  nature  of  a  loan  to  the  banks  without 
interest. 

A  business  man  who  has  from  ten  to  twenty  times 
as  large  a  cash  fund  as  is  needed  for  current  use,  cer- 
tainly would  not  be  expected  to  keep  this  on  deposit 
in  a  commercial  bank,  unless  the  commercial  bank 
made  an  arrangement  with  him  to  pay  him  a  liberal 
rate  of  interest  on  his  deposit.     Such  an  arrangement 


168  THE  BANK   AND   THE  TREASURY 

would  amount  to  a  loan  from  the  customer  to  the 

bank.     When  such  deposits  are  made  they  are  usually 

represented  by  certificates-of-deposit, 
The  "deposit"  a  j  u  a.  ^ 

loan  ^^  ^^^  under  such  agreements  as  to 

distinguish  them  clearly  from  the  ac- 
tive accounts  of  customers.  To  argue  that  a  deposit 
of  all  the  revenues  of  the  Government  should  be  made 
with  the  banks,  and  that  these  should  be  considered 
as  an  ordinary  customer's  account,  does  not  comport 
with  the  practice  of  banks  nor  with  the  business  rea- 
soning of  those  very  men  who  are  now  using  the 
argument  for  the  purpose  of  bringing  public  opinion 
to  support  such  a  conclusion. 

If  the  contention  were  that  the  Government  should 
make  such  deposits,  but  that  the  bank  was  to  pay  a 
reasonable  interest  for  the  same,  then  there  might  be 
some  ground  of  support  to  the  argument.     But  in 

How "  deposits "  the  same  process  of  reasonmg  by 
ivithout  interest         ^,•  ^    •.   •    ^    ^J\  .r,   a.  .1.     r^  a. 

weaken  capital      ^^^^^h  it  IS  held  that  the  Government 

support.  should   be   considered    in   the   same 

light  as  other  depositors,  the  advocates  of  this  doc- 
trine also  affirm  that  the  bank  "cannot  afford  to  pay 
interest  on  such  deposits."  The  result  of  such  a 
transfer  of  money  from  the  United  States  Treasury 
to  the  banks  has  been  to  encourage  the  banks  in  time 
of  minimum  money-demand  to  rely  on  the  funds  of 
the  Government  for  the  support  of  their  own  credit- 
accounts,  instead  of  relying  on  their  own  capitaliza- 
tion. 


ASSUMPTIONS   MADE  BY  THE   GOVERNMENT     161) 

The  weakening  of  capital  support  to  bank-credit- 
accounts  is  not  the  only  cause  for  public  anxiety. 
The  *' deposit"  of  general  funds  of  the  Treasury 
leaves  nothing  to  support  the  gold-reserve  but  bank- 
credit.  Under  such  a  financial  plan  we  would  have 
a  credit-money  that  in  time  of  special  financial  stress 
would  find  its  foundation  in  the  credit  of  the  very 
institutions  on  which  the  greatest  pressure  is  brought 
Makes  the  Gov-  ^^^  "^oney  payment.  Gold  redemp- 
ernment  a  disturb-  tions  and  the  maintenance  of  the 
mg  jac  or  Treasury  reserve  when   redemptions 

are  made  in  emergency  must  fall  on  the  bank.  But 
the  monetary  disturbance  does  not  end  here;  a  "de- 
posit" of  gold  by  the  Government  causes  the  bank 
to  dispose  of  gold  previously  held.  This  dislodge- 
ment  of  gold  from  the  reserves  also  leaves  the  bank 
in  a  less  advantageous  position  for  redeeming  its 
note-issues  when  demands  may  be  made  on  these. 
The  whole  effect  is  the  same  as  a  credit-money  in- 
flation; it  tends  to  increase  gold  exportation  in  time 
of  minimum  money-demand,  and  to  accentuate  or 
increase  gold  importation  in  time  of  maximum 
money-demand. 

In  appeals  to  the  confidence  of  the  public  it  is 
common  practice  for  banks  to  advertise  themselves 
as  "Government  Depository."  The  implication  is 
that  such  a  relation  should  commend  them  to  the 
public.  In  the  light  of  the  present  financial  relations 
question  might  be  raised  as  to  whether  borrowings 


170  THE   BANK  AND   THE   TREASURY 

of  this  kind  should  not  be  used  as  a  reason  why  the 
pubhc  should  seek  another  institution  for  current 
credit  accommodations.  The  conclusions  just  an- 
nounced do  not  mean  that  the  practices  on  the  part 
of  the  Government  of  loaning  to  the  banks  by  "is- 
sues" and  by  "deposits"  may  not  be  used  to  great 

advantage,  and  that  this  advantage 
Possibilities  in  ^  ■,  -      i       o     i  i^  • 

these  practices      ^^Y  ^^^t  be  mutual.     Such  a  result  is 

possible,  provided  the  practice  is  sub- 
ject to  regulation  which  will  prevent  the  loan  from 
weakening  the  institution  of  commercial-credit.  To 
accomplish  such  results  and  to  secure  the  advantage 
referred  to,  however,  the  Treasury-deposit  to  the 
bank  must  be  properly  considered  as  a  loan  from  the 
Government  to  the  bank,  which  is  made  under  such 
conditions  only  as  to  provide  a  market  in  which  the 
banks  may  obtain  money  by  hypothecation  of  capi- 
tal-resources at  a  fair  market  rate,  when  otherwise 
in  the  open  market  they  might  be  forced  to  pay  rates 
which  would  force  a  curtailment  of  commercial  ac- 
commodations. 


Chapter  XIII 

ADVANTAGES      OF     NATIONAL     BANKS     UNDER     THE 

PRESENT    PRACTICE    OVER    STATE    AND 

PRIVATE    BANKS 

Other  conditions  being  equal  there  are  two  ways 
only,  under  the  present  practice,  by  which  a  National 
bank  may  enjoy  an  advantage  over  private  and  State 
banks:  The  first  advantage  lies  in  the  possible  in- 
creased income  to  be  obtained  from 
Two  advantages    i        i  j  t_     •     r       t^  •  n 

enjoyed  bonds  used  as  a  basis  for     issues    , 

the  second  advantage  lies  in  the  pos- 
sible increased  income  to  be  derived  from  "  Govern- 
ment deposits."  At  the  ruling  market  prices  and 
the  present  rate  of  interest  receivable,  the  possibility 
of  obtaining  an  increased  return  on  investments  in 
Government-bonds  without  the  issue-privilege  is 
small,  if  not  wholly  lacking.  A  statement  of  the  net 
investment-return  on  bonds  as  computed  by  the 
Government  Actuary  is  as  follows: 

Investment-Return  stated  in  Dollars  per  Hundred  based  on  January 
Prices,  1895-1902 
Ss  of  1904  45  of  1907         4s  of  1925  3s  of  1918      2S  of  1930 

895 $3.01  $2.76  _  _  _ 

896 3-29  3-OI  $3-21 

897 2.88  2.71  2.91  -  - 


2-55  2.33  2.55 

2.45  2.32  2.48  $2.54 


900 1.81                1.91  2.25  1.75  $i.8j 

901 1. 18                1.69  2.04  i,.58  1.75 

902 1.67                1.72  1.90  I.  1.6529 

[171] 


172       THE  BANK  AND  THE  TREASURY 

Assuming  that  all  of  the  Government-bonds  held 
by  a  National  bank  are  hypothecated  for  issues,  and 
that  "par  value"  be  received  in  notes,  these  notes 

''Issues'''  com-  "^^Y  ^^^^  ^^  Vi^Q^  by  the  bank  as 
pared  with  legal-  money.  They  may  not,  however,  be 
tender  reserves  counted  legally  as  a  part  of  the  re- 
serve. If  the  notes  are  used  to  purchase  "commer- 
cial paper"  then  the  bank  may  not  purchase  more 
"paper"  than  it  has  notes,  whereas  an  equal  amount 
of  legal-tender  money  held  in  reserve  to  support 
credit-accounts  (deposits)  would  permit  the  bank  to 
buy  from  two  to  four  times  as  much  of  the  commer- 
cial paper  offered  by  customers  (depositors).  Such 
a  use  of  the  notes  would  therefore  cause  the  bank  to 
do  business  at  a  loss. 

The  bank,  however,  may  make  the  notes  available 
for  the  highest  banking  return  by  paying  them  out  in 
response  to  money-demands  (as  for  example  in  set- 
tlement of  balances  due  to  distant  banks)  and  hold 

the  legal-tender  money  received  as 
Elements  of  min   ,,  ??     rm  •     j      •  -^    .1 

and  loss  reserves.        Ihis  device  permits  the 

National  banks  to  avoid  the  disability 
attaching  to  the  "notes,"  which  prevents  the  "notes" 
from  being  held  as  reserves,  but  for  the  same  reason 
forces  the  bank-note  into  general  circulation  to  sup- 
plant the  legal-tender  holdings.  Assuming  that  the 
bank  in  question  succeeds  in  thus  exchanging  its 
entire  "issue"  for  legal-tenders,  then  the  only  dis- 
ability which  it  suffers  is  the  tying  up  of  the  amount 


ADVANTAGES   OF   NATIONAL   OVER   STATE   BANKS    173 

of  its  capital  represented  by  the  ''margins,"  i.e.,  by 
the  "premiums,"  the  "five  per  cent  fund  with  the 
Treasury,"  etc.  With  these  two  factors  alone  to  be 
considered,  then,  if  the  investment  return  on  the 
bonds  were  two  per  cent,  and  the  "margin,"  including 
the  "premiums"  and  the  "five  per  cent  fund,"  were 
ten  dollars  per  hundred  (and  if  again  it  be  assumed 
that  one  dollar  in  reserve  will  support  four  dollars  of 
credit-accounts,  and  that  the  rate  of  interest  in  com- 
mercial loans  were  five  per  cent),  then  the  margin  of 
income  lost  to  the  business  on  account  of  capital 
invested  in  "margins"  would  equal  two  per  cent  or 
exactly  the  same  amount  as  the  income  realized  on 
the  bonds.  Under  such  circumstances  the  advantage 
to  the  National  bank  would  be  nil. 

The  same  conclusion  may  be  drawn  from  the 
computations  of  the  Government  Actuary  found  on 
page  33  of  the  Comptroller's  Report,  1902.  In  this 
it  is  assumed  that  the  notes  may  be  invested  at  the 
rate  of  six  per  cent,  and  on  this  assumption  the  result 
exhibited  is  as  follows: 

2S  of  1930 $6.62  per  %ioo 

3s  of  1903 6.16  per    100 

4s  of  1907 6.19  per    100 

4s  of  1925 5.94  per    loo 

5s  of  1904 5.96  per    100 

Such  a  result  does  not  show  any  considerable  ad- 
Advantage  small  vantage  from  "bond  investment  and 
under  present  issue"  as  it  would  not  be  logical  to 
^''''^'''^  assume  that  the  "note"  may  be  in- 

vested at  any  higher  rate  than  could  the  "legal-tender 


174  THE  BANK  AND  THE  TREASURY 

money"  used  to  purchase  the  bond.  Assuming  that 
the  note  may  be  used  with  equal  advantage,  however, 
in  the  above  showing,  there  would  be  a  fraction  of 
one  per  cent  of  profit  on  three  classes  of  bond  invest- 
ments, and  a  fraction  of  one  per  cent  of  net  loss  on  two 
others  represented. 

In  this  result,  however,  the  assumption  is  that  the 
''note"  is  as  useful  to  the  banker  as  are  gold  certifi- 
cates or  other  forms  of  money.  If  this  be  an  over- 
statement, then  there  may  be,  in  truth,  a  loss  to  the 
bank  on  every  class  of  bonds  which  is  here  made  the 
basis  for  actuarial  calculation.  To  say  the  least,  the 
margin  of  net  profit  in  "issue"  is,  in  the  judgment 

....  of  bankers,  so  small  that  few  have 

Possibilities  of  a  m    i  .  i  i  r  ,  i 

l^^g  ever  availed  themselves  of  the  maxi- 

mum issue  privilege.  Quoting  from 
Mr.  Ridgely,  in  an  address  delivered  on  the  evening 
of  December  i8,  1903,  at  a  banquet  given  by  the 
New  York  State  Bankers'  Association:  "In  the  Re- 
port of  the  Comptroller  of  the  Currency  just  made 
there  is  given  a  table  showing  the  percentage  of  the 
issues  outstanding  to  permissible  circulation,  from 
1863  to  1902.  The  maximum  of  81.6  per  cent  was 
reached  in  1882,  and  the  minimum  of  44.1  per  cent 
in  1892,  and  since  the  Act  of  1900  it  has  been  a  little 
over  50  per  cent,  now  being  53.32  per  cent.  It  is 
hard  to  figure  now  whether  there  is  any  profit  at  all, 
as  it  depends  upon  the  amount  of  notes  which  can 
be  outstanding  and  the  prices  of  bonds.     On  circu- 


ADVANTAGES   OF  NATIONAL   OVER   STATE  BANKS    175 

lation  based  on  some  classes  of  bonds  there  is  a 
positive  loss." 

In  the  foregoing  discussion  the  assumption  has 
been  that  the  banks  which  receive  "issues"  from  the 
Government  have  desired  to  keep  them  outstanding, 
and  the  present  practice  conforms  to  the  assumption 
made.  When  this  is  done,  however,  the  question  of 
advantage  or  disadvantage  of  "  issue  "-privilege  must 
be  considered  as  pertaining  to  a  use  of  "issues"  in 
lieu  of  "credit-accounts,"  for  the  purchase  of  legal 
"  cash  "-reserves.  In  the  first  case,  there  would  be  a 
"Noies"  com-  positive  loss  in  that  the  capital  of  the 
pared  with  "de-  bank  could  not  be  used  for  banking 
^^^^^^  purposes;  in  the  second  case,  the  in- 

creased income  from  bonds  would  not  more  than 
compensate  for  the  margin  of  capital  which  is  made 
unavailable  —  being  invested  in  "margins."  The 
point  here  made  is,  that  viewed  in  the  light  of  present 
practices  (i.e.,  looking  upon  the  issues  as  a  form  of 
funds  to  be  currently  used  as  a  part  of  the  permanent 
money  stock)  the  issue-privilege  is  of  little  or  no 
advantage  to  the  National  bank,  and  in  certain  cir- 
cumstances may  stand  in  the  way  of  obtaining  the 
best  business  results. 

Advantages  in  the  "Government  Deposit^''  Privilege 

The  second  special  privilege  accorded  to  the  Na- 
tional bank  by  the  Government  (viz.,  the  privilege  of 
hypothecating  invested  capital-resources,   or  "gilt- 


176       THE  BANK  AND  THE  TREASURY 

edge"  securities,  for  Government  loans)  presents  a 
somewhat  more  alluring  prospect.  By  such  an 
arrangement,  under  present  practice,  the  money 
surplus  of  the  Treasury  is  looked  upon  as  a  prize  to 
be  taken  for  the  use  of  banks  as  ''reserves"  without 
the  payment  of  interest,  in  exchange  for  demand 
obligations  against  which  no  "reserve"  need  be  kept. 
The  advantage  in  this  is  two- fold:  (i)  The  money 

received  from  the  Government  does 
vantage       ^       ^^^  suffer  the  legal  disability  placed 

on  ''issues."  It  is  in  the  form  of  gold 
or  demand  obligations  of  the  Government  (credit- 
money)  payable  in  gold.  (2)  It  is  procured  at  a  less 
expense  than  "issues,"  not  being  subject  to  a  tax, 
and  being  relieved  from  the  cost  of  plates,  from 
maintenance  of  a  redemption  fund,  etc.  Assuming 
that  the  amount  invested  in  bonds  is  a  part  of  the 
capital  which  would  be  permanently  needed  for 
"cash-reserves,"  and  that  the  bonds  were  hypothe- 
cated, then  the  money  obtained  from  the  Govern- 
ment could  be  used  to  the  same  advantage  as  if  it 
had  not  been  invested  in  the  bonds.  The  bank, 
however,  would  be  required  to  use  more  capital  to 
obtain  the  amount  necessary  for  current  redemptions. 
The  only  elements  to  be  considered  in  estimating 
profit  or  loss  in  the  practice  could  be  found  in  the 
capital-return  on  the  bonds  and  the  amount  of  bank- 
ing capital  tied  up  in  "margins."  In  this  there 
might  be  a  small  advantage  over  the  "issue."     But 


ADVANTAGES   OF  NATIONAL  OVER  STATE  BANKS    177 

assuming  that  the  amount  so  invested  in  bonds  were 
a  part  of  the  "  invested-reserve "  (i.e.,  the  capital 
surplus  over  and  above  the  permanent  cash  require- 
ments), then  the  money  obtained  from  the  Govern- 
ment might  again  be  re- invested  to  the  same  advan- 
tage as  if  no  bonds  had  been  purchased.  Assuming 
that  the  margin  were  ten  per  cent  and  that  the  net 
return  on  the  bonds  were  two  per  cent,  the  bank 
would  obtain  twenty  per  cent  on  the  amount  invested 
in  the  margin. 

Reasons  why  the  ^' Deposit-Loan^^  Privilege  is  more 
Advantageous  than  the  ^^ Issue-Loan''^  Privilege 

It  is  not  in  this  character  of  items,  however,  that 
the  large  advantage  lies.     The  practice  of  the  Gov- 
ernment   being    to    make    "deposit- 
^^ Deposit-loans^^   i  n        i         u  •  • 

in  emergency        ^^ans     only  when  emergencies  arise, 

the  National  bank  has  a  Government 
fund  at  hand  to  which  it  may  apply  for  cash  in  time 
of  greatest  need.  This  practice  is  sustained  by  the 
history  of  nearly  every  financial  stringency  since  the 
establishment  of  the  National  banking  system,  when 
the  Government  was  in  a  financial  condition  to  lend 
aid.  During  the  period  of  forced  liquidation  from 
1 90 1  to  1903  the  aid  lent  by  the  Government  to  the 
National  banks  was  the  most  striking  single  feature 
in  giving  support  to  the  money  market.  An  addition 
of  over  $100,000,000  to  the  money-reserves  of  Na- 
tional banks  by  transfer  from  the  Treasury  within 


178  THE   BANK   AND   THE   TREASURY 

a  few  months  went  far  toward  preventing  a  wholesale 
collapse  in  the  overstrained  credit  of  commercial 
banks,  while  they  were  slowly  applying  pressure  to 
those  who  had  obtained  credit-accounts  in  exchange 
for  collateral  loans. 

A  private  bank  or  a  State  bank  in  time  of  financial 
stress  must  look  to  the  market  for  funds.  To  obtain 
money  with  which  to  maintain  its  credit-accounts, 
without  curtailing  loans  to  customers,  it  must  convert 
some  of  its  capital-assets.  This  may  be  done  either 
by  sale  or  by  hypothecation.  If  by  sale,  then  the 
bank  must  take  the  market  price  for  securities,  and 
on  an  unfavorable  market  must  suffer  an  investment 
loss.  If  by  hypothecation,  then  the  bank  must  pay 
the  market  rate  for  money.  The  National  bank,  on 
Advantage  of  the  other  hand,  if  it  has  "gilt-edge" 
" cmer^mcy " /oa«5  securities  "reserved,"  may  obtain 
without  interest  ^^^^^  ^^^^  ^j^^  Government  by  hy- 
pothecation free  of  charge  —  i.e.,  without  payment 
of  any  interest  at  all.  To  illustrate  this  advantage : 
Let  us  suppose  that  the  market  for  securities  is  five 
per  cent  below  the  price  paid  by  the  bank.  To  sell 
capital-resources  under  such  conditions  would  entail 
a  direct  investment  loss  of  five  dollars  per  hundred. 
Again  let  us  suppose  that  the  market  rate  for  money 
has  risen  to  ten  per  cent  in  the  market,  then  this 
extraordinary  rate  must  be  paid  on  hypothecation. 
Either  circumstance  would  put  the  State  bank  or 
private  bank  at  a  disadvantage  in  competition  with 


ADVANTAGES   OF  NATIONAL   OVER   STATE  BANKS    179 

the  National  bank,  which  may  obtain  "issues"  or 
"deposits"  from  the  Government  on  hypothecation 
of  its  investments. 

The  "issue-privilege"  might  be  used  with  the 
same  advantage  as  the  "deposit-privilege"  if  the 
banks  chose  so  to  do.  The  difference  lies  in  the 
practice  of  the  Government  rather  than  in  the  nature 
of  the  right.  The  "deposit-loan"  privilege  has  been 
"Issues  not  ^^  opportunity  extended  for  the  con- 
loanedin  enter-  version  of  "invested-reserves"  or  re- 
S^^^^y  serve    capital-resources    in    time    of 

emergency,  thus  seeming  to  increase  the  banking 
power;  the  "issue "-privilege  is  an  opportunity  to  use 
"money-reserves"  for  direct  investment,  which  seems 
to  permanently  increase  the  money  stock  without 
adding  anything  to  the  banking  power.  This  con- 
clusion is  drawn  from  present  practice  under  the 
National  Bank  Act,  and  does  not  reflect  on  the  pos- 
sibilities of  using  both  privileges  to  a  much  better 
result. 


Chapter  XIV 

THE  AMOUNT  OF  ELASTICITY  FOR  WHICH  PROVISION 
IS   TO   BE   MADE 

An  essay  on  elasticity  and  sound  banking  would 
be  without  bearing  if  it  failed  to  consider  the  amount 
of  fluctuations  and  demands  for  current  funds.  And 
such  a  consideration,  to  be  of  value,  must  have 
reference  to  commercial  and  financial  experience, 
rather  than  to  arbitrary  conjecture.  The  current 
funds  for  which  demands  are  made  in  business  are 
of  two  kinds,  viz.,  money  and  credit.  Each  of  these 
has  its  own  peculiar  history  and  importance.  Of 
fluctuations  in  total  money-demands  the  statistics 
published  by  the  Department  of  the  Treasury  are 
the  best  record. 

Fluctuations  in  Total  Money  Supply  and 
Demands  of  the  Country 

The  general  money  supply  is  increased  or  de- 
Variations  in  creased  by  coinage  and  redemption, 
total  national  by  importation  and  exportation.  Aside 
money-demands     ^^^^    ^^^^^^   ^^^    ^^^^^^^  ^^  variation 

are  comparatively  insignificant.     From  the  Treasury 
statistics  it    is    found   that    the   greatest   variation 

[180] 


AMOUNT   OF   ELASTICITY  REQUIRED  181 

within  a  period  of  a  single  year  since  1890,  allowing 
for  the  average  rate  of  increase,  is  about  $244,000,- 
oco,  or  about  ten  per  cent  of  the  National  money 
supply.  It  would  seem  that  the  fluctuation  in  total 
money  supply  of  the  country  is  not  a  serious  matter 
—  that  the  increasing  and  decreasing  need  of  the 
future,  as  in  the  past,  may  readily  be  met  through 
present  agencies  of  coinage,  issue,  and  importation 
without  seriously  disturbing  the  world's  markets. 

But  the  fluctuations  in  total  National  money-de- 
mand with  respect  to  total  money  supply  are  not  as 
significant  as  are  the  variations  of  supply  and  demand 
with  respect  to  the  several  financial  groups  and  insti- 
tutions of  which  the  National  system  is  composed. 
This  is  true  for  the  reason  that  within  the  National 
group  specific  variations  of  much  larger  proportions 
Greater  inipor-  ^'^'^^Y  be  completely  lost  sight  of.  For 
tance  oj  variations  example :  Within  a  period  of  a  year  the 
inspecificdemand  treasury  may  show  a  monetary  loss 
of  $250,000,000,  while  the  bank-reserves  may  show 
a  gain  of  equal  amount.  These  fluctuations  would 
not  in  any  manner  affect  the  total  money  supply  of 
the  country.  Again,  the  banks  might  lose  $250,000,- 
000  from  their  reserves  and  the  money  in  circulation 
among  the  people  might  increase  in  like  amount. 
Such  fluctuations  would  be  lost  sight  of  in  an  exhibit 
of  National  money  supply  and  demand.  Each  year 
just  such  fluctuations  as  these  rise  like  a  spectre  be- 
fore thoughtful  bankers. 


182  THE  BANK  AND  THE  TREASURY 

As  between  the  several  financial  groups  there  are 
three  separate  inquiries:  (i)  What  are  the  fluctuations 
in  the  money-demands  made  by  the  Federal  Govern- 
ment and  by  the  several  State  treasuries;  (2)  what 
are  the  fluctuations  in  money-demands  made  by 
banks  for  money-reserves  with  which  to  support  their 
credit-accounts;  and  (3)  what  are  the  fluctuations  in 
the  demands  among  the  people  for 
":/;;S:l  "tin^ash-  and  "pocket-change,"  etc. 
As  to  these  several  classes  of  fluctua- 
tions in  demand  we  may  never  have  complete  data. 
Fortunately,  however,  we  have  reports  and  statistics 
from  which  a  safe  approximation  may  be  reached. 
The  Bureau  of  Statistics  of  the  Department  of  Com- 
merce and  Labor  furnishes  monthly  statements  of 
changes  in  the  money  supply  in  the  Treasury  and  in 
circulation.  Five  times  per  year  the  Comptroller  of 
the  Currency  makes  public  the  changes  in  National 
bank-reserves;  several  inquiries  have  also  been  made 
with  reference  to  the  daily  averages  of  deposits  and 
withdrawals  of  National  banks  by  months;  the  State 
banking  and  fiscal  reports  furnish  supplementary 
evidence  for  different  sections. 

Fluctuations  in  Demands  on  the  Treasury 

Giving  consideration  first  to  the  demands  of  the 
Treasury,  the  widest  variation  from  the  average  in- 
crease in  fiscal  needs  during  the  last  fifteen  years  has 
been    about    $160,000,000.     This    amount    is   well 


AMOUNT   OF   ELASTICITY  REQUIRED  183 

within  the  customary  money  balance  carried.  But 
assuming,  as  now  happens,  that  money-demands  on 
the  Treasury  may  increase,  at  a  time  when  the  reve- 
nues are  decreasing,  this  customary  balance  may  be 
threatened  with  extinction.  Nevertheless,  the  prob- 
lem of  adjustment  of  Treasury  resources  to  Treasury 
needs  is  not  in  itself  a  factor  disturbing  to  business. 
Through  the  ample  loan-power  of  the  Treasurer, 
money  may  be  obtained  by  importation  at  any  time 
that  a  money  surplus  in  the  vaults  of  the  banks  is  not 
available  to  the  Government.  It  is  only  when  the 
American  money  rate  is  low,  when  the  money  stock 
of  private  institutions  is  so  large  that  they  can  afford 
to  sell  at  rates  far  below  the  usual  commercial  rate, 
that  the  fiscal  needs  of  the  Treasury  will  be  supplied 
from  the  banks.  In  other  words,  when  the  Govern- 
ment is  forced  on  the  world's  market  to  obtain  funds 
for  its  own  needs,  importation  will  serve  to  strengthen 
the  National  money  situation.  When  loans  are 
Fiscal  transac-     taken  by  our  own  people,  such  invest- 

honshavehtile     ^^^^^  g^j-^g  ^o  deter  speculative  ex- 

bearing  on  elas-  ^      ^  _        ^ 

ticiiy  cesses  coincident  with  a  large  private 

surplus.  The  monetary  disturbances  that  in  the 
past  have  arisen  from  Treasury  needs  have  been 
due  to  threatened  attack  on  the  financial  integ- 
rity of  credit-money-issues  of  the  Government  or 
to  the  calling  in  of  loans  previously  made  by  the 
Treasury  to  the  banks.  The  purely  fiscal  trans- 
actions of  the  Government  have  served  to  strengthen, 


184  THE  BANK  AND  THE   TREASURY 

rather  than  to  weaken,  our  institutions  of  private- 
credit. 

The  popular  notion  that  the  money  in  the  vaults 
of  the  Government  is  abstracted  from  the  money 
stock  of  the  country  is  erroneous.  Assuming  that 
$150,000,000  were  the  average  reserve  carried  in  the 
general  fund  of  the  Federal  Treasury,  and  that 
$100,000,000  were  the  average  money-reserve  carried 
in  the  vaults  of  State  and  local  treasuries,  this  aver- 
age reserve  amounting  to  $250,000,000  would  be 
taken,  not  out  of  the  money  stock  available  for  busi- 
ness use  in  the  United  States,  but  out  of  the  money 
stock  of  the  world.  If  originally  the  Treasury  re- 
serves had  suddenly  been  abstracted  from  the  money 
Notion  thai  Treas-  circulation  of  the  United  States,  it 
tiry  funds  reduce  na- would,  by  business  necessity,  soon 
tion^s  stock  in  trade  ^^^^^^  equalized    by  importation; 

and  after  an  equilibrium  had  thus  been  established 
this  reserve  would  no  longer  be  a  factor  in  the  money 
market.  Only  the  fluctuations  or  variations  in  this 
Treasury  reserve  would  ever  reach  the  exchanges. 
An  increase  in  Treasury  reserves  without  importation 
would  operate  to  decrease  the  supply  for  other  pur- 
poses. Conversely,  a  decrease  in  fiscal  money  sup- 
plies without  exportation  would  operate  to  increase 
the  money  supply  of  the  country  which  is  outside  of 
the  Treasury.  The  effect  of  this  increase  or  de- 
crease, it  is  true,  would  first  be  felt  by  persons  or 
institutions  of  first  contact,  but  should  the  amount 


AMOUNT   OF   ELASTICITY  REQUIRED  185 

of  increase  or  decrease  affect  the  funding  needs  of 
these  persons  or  institutions  of  first  contact,  the  de- 
mand or  supply  would  at  once  be  passed  on  through 
the  market,  and  the  equilibrium  again  restored. 

Fluctuations  in  the  Money-Demands  of  the  Banks 
and  of  the  People 

From  the  point  of  view  of  elasticity  the  only  money- 
demands  that  are  serious,  and  therefore  the  principal 
ones  to  be  considered,  are  those  made  by  the  banks 
as  a  means  of  supporting  their  own  credit-accounts, 
and  those  made  by  the  people  for  "till-cash"  and  for 
"change,"  etc.  These  two  demands  may  be  treated 
as  practically  the  same,  since  the  method  by  which 
money  is  obtained  by  the  people  is  directly  or  indi- 
rectly to  draw  on  the  banks.  The  purpose  of  selling 
commercial  paper  or  other  bankable  assets  to  a  bank 
The  chief  fluciua-  is  to  obtain  a  current  fund  for  use  in 
Hons  in  money-  business.  Under  ordinary  circum- 
demands  of  banks  ^^^^^^^  ^  customer  prefers  these  funds 

in  the  form  of  a  bank-account.  But  when  occasion 
requires  the  bank  may  be  asked  by  the  customer  to 
pay  its  account,  and  thus  money  is  withdrawn  from 
the  bank-reserve.  The  banks  stand  in  the  position 
of  a  money  market  to  the  people.  The  banking 
business  is  one  of  selling  money  "short"  and  then 
making  delivery  "on  demand."  It  is  through  the 
process  of  making  deliveries  on  "short  sales"  of 
money  by  the  banks  that  the  reserves  are  depleted. 


186  THE  BANK  AND  THE  TREASURY 

The  largest  fluctuation  from  the  average  increase 
or  decrease  of  money-reserves  of  National  banks 
recorded  during  the  last  fifteen  years  is  about  $155,- 
000,000.  This  was  under  circumstances  of  extreme 
monetary  disturbance,  and  a  general  condition  of 
doubt,  which  in  many  localities  amounted  to  actual 
Amount  of  elas-    panic.     Assuming  that   this   amount 

ticiiy  needed  in     ^^j^j     represents  the  maximum  flue- 

bank  money-re-  ^       ^ 

serves  tuations  in  money-demands  on  other 

banking  institutions  proportionate  to  their  capitali- 
zation (and  the  assumption  would  seem  a  conserva- 
tive one  since  the  National  banks  are  depositories  for 
private  banks,  State  banks,  and  trust  companies),  the 
extreme  fluctuation  in  money-demands  made  by  all 
banking  institutions  would  not  exceed  $375,000,000. 
This  may  be  taken  as  the  degree  of  elasticity  needed 
in  the  money  circulation  to  meet  the  money-demands 
of  banks,  and,  through  the  banks,  to  meet  the 
money-demands  of  the  public. 

Fluctuations  in  Demands  jor  Credit-Funds 

Turning  to  the  question  of  elasticity  for  which 
provision  is  to  be  made  in  the  other  form  of  current 
funds  used  by  the  business  community  (viz.,  bank- 
accounts),  the  same  process  of  reasoning  may  be 
followed.  Taking  the  statistics  of  National  banks 
five  times  per  year  as  a  basis  for  calculation,  the 
largest  variation  in  average  decrease  or  increase 
within  fifteen  years  has  been  about  $875,000,000,  or 


AMOUNT   OF   ELASTICITY  REQIHRED  187 

about  fifteen  per  cent  of  the  average  amount  of  active 
bank-credit  at  the  time  outstanding. 

Using  another  basis  for  calculation  of  the  extreme 
possibilities  of  fluctuations  in  demands  for  credit- 
accommodations  which  may  be  sought  by  the  busi- 
ness community,  the  statistics  of  daily  averages  of 
deposits  and  withdrawals  may  be  invoked.  From 
the  investigation  made  in  1903,  it  would  appear  that 
the  average  daily  demand  on  National  banks  is  about 
$226,000,000,  and  that  this  average  daily  demand 
fluctuated  by  months  from  $258,000,000  to  $200,- 
000,000.  In  other  words,  from  the  month  of  Jan- 
Computation  ^^^7  ^^  ^^^  month  of  August  there  was 
jrom  daily  a  fluctuation  in  daily  averages  of  about 

averages  $6o,ooo,ooo.     It  also  appears  that  the 

total  amount  of  funds  provided  in  the  form  of  bank- 
accounts  changed  hands  on  the  average  about  once 
in  fifteen  days  —  that  is,  that  the  average  length  of 
time  for  which  the  business  man  provides  current 
funds  needful  to  his  business  is  about  half  a  month. 
Assuming  that  $60,000,000  is  a  maximum  fluctuation 
in  daily  demands  on  National  banks  for  credit-ac- 
commodation, and,  further,  that  the  active  accounts 
of  all  commercial  banking  institutions  is  about 
$6,000,000,000;  assuming  again  that  the  credit  fluc- 
tuations in  other  institutions  are  in  like  proportion  to 
those  of  National  banks,  and  that  the  average  period 
for  which  credit-accommodation  is  asked  is  fifteen 
days;  assuming  further  that  this  gross  fluctuation  in 


188  THE   BANK   AND   THE  TREASURY 

demand  fell  within  the  period  of  average  loans,  in- 
stead of  within  a  period  of  a  year,  then  the  maximum 
fluctuation  in  demands  for  credit-accommodations 
would  rise  to  $1,800,000,000,  or  about  thirty  per  cent 
of  the  active  accounts  outstanding.  This  would 
seem  an  extreme  estimate  as  to  the  elasticity  required 
under  conditions  most  favorable  to  credit  expansion. 
Using  the  foregoing  conclusions  as  a  basis  for 
determining  the  amount  of  elasticity  actually  needed 
to  date,  it  would  seem  that  the  preparation  to  be 
made  for  response  to  fluctuating  demands  for  money 
by  banks  amounts  to  about  $400,000,000  —  i.e., 
that  provision  for  an  emergency  currency  of  about 
thirty  per  cent  of  the  National  bank  capitalization 

would  be  adequate  to  meet  every  fluc- 
Tolal  elaslicity      ...  j  j        'i-i       i.    • 

rcQuired  tuatmg  money-demand   without  im- 

portation or  high  market  rates.  By 
the  same  criterion  it  would  seem  that  the  banks 
should  provide  for  an  increasing  and  decreasing 
credit  fluctuation  of  from  $1,000,000,000  to  $1,800,- 
000,000,  or  from  sixteen  to  thirty  per  cent  of  the 
average  volume  of  credit-accounts  used  as  current 
funds. 

Haw  Fluctuating  Demands  Affect  the  Present 
System 

Before  reaching  conclusions  as  to  the  manner  in 
which  this  fluctuating  demand  for  money  and  credit 
may  be  met,  it  may  also  be  well  to  trace  the  effect  of 


AMOUNT  OF   ELASTICITY  REQUIRED  189 

demands  on  our  system  as  at  present  operated.  This 
can  best  be  done  by  means  of  charts,  which  at  a 
glance  will  give  the  results  of  many  years  of  ex- 
perience. Under  our  present  practice  the  loan  to 
reserve  agents,  or  the  "reserve  deposit,"  is  the  form 
Money-demands  '^^  which  the  surplus  money  of  banks 
of  the  country  fall  is  invested  in  time  of  low  demand. 
on  reserve  banks    j^  j^  ^^  ^^^  ^^^^^^^  ^^  "calling"  these 

reserve  loans  that  the  investing  bank  expects  to  re- 
store to  itself  the  funds  loaned  in  time  of  money  need. 
On  Chart  V  is  represented  the  money-demands  made 
on  all  National  banks  of  the  United  States  by  their 
customers,  and  also  the  demands  made  by  investing 
banks  on  reserve  agents.  From  this  it  conclusively 
appears  that  the  demand  for  money  made  by  cus- 
tomers on  all  of  the  many  banks  of  the  United  States 
finally  falls  on  the  reserve  agents  —  that  is,  through 
our  peculiar  system  of  investment  of  capital  surplus 
all  of  the  fluctuations  in  money-demands  of  the 
people  fall  on  a  few  banks. 

Another  fact  quite  as  conclusively  appears  from 
Chart  VI,  opposite  page  70,  viz.,  that  the  demands 
made  on  reserve  agents  finally  fall  on  the  banks 
The  demands  on  of    the   city   of    New  York.     Trac- 

reserve  agents       -       ^^^  fluctuations  on  this  chart    it 

which  fall  on  ^ 

New  York  will  appear   that  every   variation   in 

money-reserves  held  by  banks  of  the  country  at  large 

finds  a  similar  variation  in  New  York  City  banks. 

That  this  may  the  more  surely  be  traced  to  the 


190  THE  BANK  AND   THE  TREASURY 

"reserve"  system,  another  chart  is  prepared  (page 
134),  which  shows  the  "amount  due  from  all  reserve 
agents"  and  the  "amount  due  from  New  York  City 
banks."  The  experience  here  recorded  leaves  no 
question  but  that  the  avenue  through  which  money- 
demands  reach  New  York  is  the  "reserve  bank." 

Another  clue  to  the  situation  is  found  in  Chart 
VIII,  opposite  page  152.  From  this  it  seems  that  the 
amount  due  from  New  York  banks  to  other  banks, 
in  every  fluctuating  detail,  is  almost  exactly  the 
amount  of  "money-reserves"  kept  by  the  banks  of 
New  York  to  support  their  own  credit-accounts. 
The  borrowed  That  monetary  disturbance  would 
money-reserves  oj  occur  under  such  circumstances  is  a 
New  York  banks  conclusion  which  might  be  reached 
by  conjecture;  that  monetary  disturbances  have 
actually  occurred  is  a  matter  of  history  and  expe- 
rience. The  record  of  the  past  and  the  evidences 
here  presented  can  leave  no  doubt  of  the  fact  that 
under  the  present  practice  of  investing  capital-re- 
serves in  loans  of  other  banks,  every  monetary  de- 
mand falls  directly  on  the  banking  centre  and  tends 
to  throw  the  whole  commercial-credit  system  into  a 
condition  of  unrest  —  a  condition  which  at  times 
deprives  outside  banks  of  the  support  of  central 
banks,  and,  again,  forces  New  York  banks  to  resort 
to  Clearing-House  certificates  for  settlement  of 
money-balances  among  themselves,  —  a  condition  of 
financial  paralysis  to  commercial  enterprise.     The 


AMOUNT   OF   ELASTICITY  REQUIRED  191 

present  method  of  supplying  money-demands,  a 
method  which  simply  shifts  the  demand  from  one 
bank  to  another,  is  one  of  the  features  to  be  consid- 
ered in  devising  ways  and  means  to  overcome  present 
defects,  and  to  give  greater  elasticity  to  the  money 
medium  and  greater  safety  to  banking  institutions, 
without  forcing  the  banks  again  to  shift  the  fluctu- 
ating demand  back  to  the  constituency  where  it 
arises,  thus  standing  in  the  way  of  extension  of 
commercial  accommodation  when  accommodation 
is  needed. 

Certain  other  features  in  credit-demands  may  be 
developed  with  reference  to  fluctuations  and  methods 
of  providing  credit-supply.  From  the  charts  of  credit- 
fluctuations  (pages  184,  202)  it  will  appear  that 
quite  a  different  practice  prevails  in  different  sections 
of  the  country.  In  the  cotton  and  tobacco  States 
fluctuations  in  credit-demands  are  as  regular  as  the 
seasons.  In  manufacturing  Pennsylvania  the  varia- 
tion by  seasons  is  scarcely  noticeable.  To  meet  these 
local  conditions  quite  a  different  method  of  capital 
equipment  would  seem  to  be  necessary.  That  a 
Conditions  in  dij-  practice  prevails  in  the  cotton  States 
jerent  sections  to  peculiar  to  themselves  when  com- 
be  considered         ^^^^^  ^-^^^  ^^^^^   ^^^^.^^^  ^^^^^  ^p_ 

pear  from  Chart  X,  opposite  page  176.  In  the 
cotton  and  tobacco  section  a  large  portion  of  the 
current  credit  given  is  procured  from  other  sections 
by  means  of   ''bills  payable"   and   "notes  re-dis- 


192  THE  BANK  AND  THE  TREASURY 

counted."  The  fluctuations  in  these  two  items  of 
account  follow  the  seasons  of  crop  removal  with  all 
of  the  precision  that  do  the  credit-accounts  of  cus- 
tomers. In  a  section  of  variegated  industry  such  as 
that  represented  for  comparison,  this  practice  does 
not  prevail.  On  the  other  hand,  it  appears  that  the 
necessity  for  meeting  periods  of  extraordinary  fluc- 
tuation, due  to  industrial  depression  and  speculative 
reaction,  is  very  much  greater,  and  should  be  brought 
into  the  calculation  of  credit  strain  on  redemption 
equipment. 


Chapter  XV 

POSSIBILITIES   OF   ELASTICITY  UNDER   OUR 
PRESENT  NATIONAL   BANKING   SYSTEM 

Many  writers  have  argued  to  the  conclusion  that 
under  our  present  practice  the  bank-note  has  in 
itself  no  possible  use  as  an  emergency  currency. 
To  enlarge  more  fully  on  this  position  three  reasons 
are  urged  why  National  bank  "circulation"  may  not 
be  increased  to  relieve  a  monetary  strain,  viz.:  (i) 
That  in  time  of  ordinary  money-demand  the  com- 
Reasons  assigned  mercial  Constituency  do  not  wish 
jor  inelasticity  in  bank-notes  for  use  in  their  business 
issues  ^^  ^^y  greater  extent  than  they  al- 

ready use  them;  if  they  did  wish  more  notes  it  is 
affirmed  they  would  call  for  them  at  the  bank  in 
exchange  for  commercial  paper  or  other  bankable 
assets  sold,  instead  of  opening  bank-accounts.  In 
so  far  as  note-issues  are  increased,  therefore,  the  in- 
crease is  in  the  nature  of  a  substitution  for  other 
forms  of  money  circulation.  (2)  That  in  time  of 
extraordinary  money-demand  under  the  present  prac- 
tice, the  bank  has  no  power  to  extend  either  its  money 
or  its  credit-accounts  to  meet  the  enlarged  business 
need  for  current  funds;  the  bank  must  literally  buy 


194       THE  BANK  AND  THE  TREASURY 

its  "notes"  from  the  Government  before  issuing 
them;  moreover,  the  "notes"  must  be  purchased  by 
use  of  the  bank's  credit,  collaterally  secured  by 
United  States  bonds  on  hand  and  other  collaterals, 
and  these  collaterals  will  cost  them  more  than  the 
amount,  in  "notes,"  realized;  the  bank  which  is  in 
straits  for  legal-tender  money,  therefore,  has  no 
power  to  obtain  "notes"  from  the  Government. 
(3)  That  when  so  obtained,  the  notes  may  not  be  as 
effectively  used  as  other  forms  of  money,  viz.,  legal- 
tender  issues  of  the  Government. 

Elasticity  as  an  Individual  Banking  Problem 

The  problem  of  elasticity  to  the  individual  bank  is 
one  which  pertains  to  its  own  credit-accounts.  Un- 
der a  highly  localized  banking  system  a  single  insti- 
tution cannot  control  the  money  supply  of  the  nation ; 
it  cannot  adapt  general  money  supply  to  general 
money-demand.  If  a  bank  possess  powers  of  credit- 
note-issue  to  meet  the  demands  of  its  own  customers 
Problem  one         ^^^  money,  it  would  to  this  extent  be 

which  pertains  to  able  to  relieve  its  own  necessities  and 
credit-accoimts       ^^  ^j^j^  ^^^^^^   ^^   ^^^  ^^  ^^^  ^^^^^ 

market.  But  the  principal  money-demand  made  on 
a  bank  does  not  come  from  its  customers;  it  comes 
from  other  banks.  Under  such  a  system  as  that  sug- 
gested by  the  "commercial  assets"  school,  there  is 
no  reason  to  suppose  that  other  banks  would  accept 
these  notes  so  issued  in  settlement  of  balances.     Or, 


ELASTICITY  POSSIBLE  IN   PRESENT    SYSTEM     195 

if  they  were  accepted,  banking  experience  further 
suggests  that  the  system  itself  would  prove  dangerous. 
Commercial-assets  money-issues  are  safe  only  when 
provision  is  made  for  other  banks  to  send  issues 
''home"  for  payment  as  fast  as  they  are  received. 
When  notes  of  other  banks  are  promptly  redeemed 
they  operate  in  the  same  manner  as  do  checks  and 
drafts. 

Credit-money-issues  by  banks,  if  properly  safe- 
guarded, cannot  materially  affect  the  fluctuations  in 
bankers'  demands,  and  this  is  the  chief  fluctuation  in 
money-demands  to  be  provided  for.  Such  issues 
may  have  the  effect  of  supplanting  the  stable  and 
"  Issues "  cannot  constant  money  supply  issued  by  the 
supply  chief  Government  which  is  now  used  for 
money-demand       a^-jj    ^^^j^n    ^^^    "pocket    change." 

That  is  to  say,  bank-issues  might  operate  to  drive 
gold,  silver,  and  Government-notes  out  of  circulation, 
but  could  not  supply  the  demand  made  by  one  bank 
against  another.  As  near  as  may  be  estimated  from 
statistics  at  hand,  the  constant  money-demand  for 
''till  cash"  and  for  personal  uses  is  at  present  about 
$1,600,000,000,  or  70  per  cent  of  the  money  out- 
side of  the  Treasury.  This  stable  or  permanent 
circulation  might  be  supplied  by  the  credit-note- 
issues  of  the  bank,  but  to  make  such  a  circula- 
tion sound  it  would  be  necessary  for  the  banks  to 
increase  their  capitalization  to  carry  the  crcdit- 
money-load  which  is  now  on  the  Treasury  —  a  charge 


196  THE  BANK  AND  THE  TREASURY 

on  capital  equal  to  about  fifty  per  cent  of  the  present 
redemption  equipment  of  National  banks. 

The  possibility  of  the  individual  bank  solving  its 
ovra  problem  of  elasticity  in  credit-accounts  under 
the  present  Law,  however,  is  not  wanting.  This 
may  be  done  through  adequate  capitalization  and 
adequate  redemption  equipment.  As  before  indi- 
cated, the  only  limitation  to  the  amount  of  credit- 
Individual  bank  accounts  that  a  bank  may  carry  is  to 
l^r^^"^  f°"nd  in  its  unimpaired  capital; 
accounts  the   only   limitation   to   the   possible 

elasticity  in  the  credit-accounts  of  such  an  institution 
is  to  be  found  in  the  amount  of  redemption  equip- 
ment which  it  provides  for  itself.  If  the  minimum 
of  credit-accounts  demanded  by  its  customers  is 
$500,000  (assuming  that  twenty-five  per  cent  is  an 
adequate  cash-reserve  to  meet  all  demands  on  its 
current  obligations),  then  the  minimum  capital  sup- 
port required  would  be  $125,000.  If  the  maxi- 
mum demand  from  customers  for  credit-accounts  is 
$1,000,000,  then,  under  the  same  assumption,  the 
maximum  capital  requirement  would  be  $250,000. 
But  in  order  to  make  possible  this  $500,000  expansion 
of  credit-accommodations  the  bank  should  be  capi- 
talized to  meet  the  maximum  redemption  require- 
ment. 

Assuming  again  that  all  the  redemption  equipment 
were  invested,  except  such  portion  as  is  necessary  to 
be  carried  in  cash  as  a  twenty-five  per  cent  money- 


ELASTICITY   POSSIBLE   IN   PRESENT   SYSTEM     197 

reserve  to  support  credit-accounts  outstanding,  then 
when  the  demand  for  customers'  accounts  is  at  a 
Power  oj  expand-  rninimum  the  bank,  if  capitahzed  at 
ing  credit  in  its  $250,000,  would  have  $125,000  of  its 
own   an  s  capital  invested  and  temporarily  held 

as  an  income-producing  asset  awaiting  an  increase  in 
money  and  credit-demands.  The  only  question  in 
determining  ability  to  expand  accounts  to  meet  in- 
creased wants  of  customers  would  be  in  the  character 
of  these  capital  reserve-investments  held  —  that  is, 
a  question  as  to  their  immediate  convertibility  into 
cash.  Should  it  at  any  time  appear  that  a  bank  were 
unable  to  meet  demands  for  current  credit-accounts 
or  for  cash,  this  inability  would  arise  from  one  of  two 
occasions:  (i)  a  too  small  capitalization,  or  (2)  an 
unwise  investment  of  surplus  capital  for  purposes  of 
redemption  reserves. 

Possibilities  of  Elasticity  in  the  National  Banking  Sys- 
tem as  a  Whole,  without  Change  in  the  Present  Law 

The  possibility  for  elasticity  in  the  National  bank- 
ing system  as  a  whole  under  the  present  Law  differs 
from  that  of  the  individual  bank  in  this,  —  that  a 
system  of  banking  such  as  the  National  banking 
May  give  elas-  System,  including  within  it  over  5,000 
ticity  to  money  different  banking  institutions,  makes 
possible  a  degree  of  elasticity  in  the 
money  circulation  adequate  to  meet  the  fluctuating 
money-demands  of  the  nation,  as  well  as  a  degree  of 


198       THE  BANK  AND  THE  TREASURY 

elasticity  in  the  credit-accounts  of  individual  banks 
sufficient  to  meet  demands  of  customers.  While  one 
bank,  with  its  comparatively  insignificant  capitaliza- 
tion, can  do  little  to  affect  the  money  market,  5,000 
banks  can  do  much.  Under  the  present  Law  the 
possibility  for  money  expansion  and  contraction  to 
meet  commercial  demands  lies  (i)  in  the  "issue- 
privilege"  and  (2)  in  the  provision  made  for  Govern- 
ment "deposits."  The  National  banks  alone  enjoy 
these  privileges.  The  "issue"  powers  not  only  give 
to  National  banks  increased  facility  for  the  conver- 
sion of  their  invested  redemption  equipment  into 
cash  by  hypothecation,  but  also  furnish  a  method 
under  the  present  Law  whereby  an  increase  in  the 
money  circulation  of  the  country  may  be  effected 
without  importation  and  without  disturbance  of  the 
money-funds  of  the  National  Treasury. 

But  such  a  result  may  be  attained  only  by  cooper- 
ration  on  the  part  of  the  many  banks  of  the  system 
by  which  the  various  individual  institutions  making 
up  the  system  would  refrain  from  hypothecating 
their  bonds  in  time  of  minimum  money  and  credit- 
demands,  and  would  hold  them  as  an  unencumbered 
capital-investment  ready  for  hypothecation  when 
Amount  oj  elas-  money-demands  might  increase.  The 
ticity  which  may  amount  of  fluctuation  in  the  money- 
he  given  demands   made  on  National   banks 

has  never  exceeded  $100,000,000.  The  total  amount 
of  bonds  owned  by  National    banks,    July,   1904, 


ELASTICITY  POSSIBLE  IN   PRESENT   SYSTEM     199 

was  over  $450,000,000.  The  total  fluctuating 
money-demands  of  the  entire  country  has  never  ex- 
ceeded $150,000,000.  If  the  capital  invested  in 
bonds  by  National  banks  alone  were  used  for  the 
purpose  of  supporting  the  fluctuating  banking  and 
business  demand  for  money,  instead  of  being  em- 
ployed as  a  means  of  supporting  the  bond  market 
and  for  increasing  the  permanent  money  supply  of  the 
country,  this  capital  investment  would  be  adequate  to 
meet  every  need  for  elasticity  in  the  money  medium. 
The  elasticity  thus  given  to  the  money  circulation 
would  be  in  response  to  money-demands  made 
through  the  banks.  In  other  words,  the  elasticity 
would  be  provided  through  those  institutions  upon 
which  demands  were  made.  Such  a  practice  would 
supply  the  fluctuating  banker's  needs  for  money  as  a 
means  for  payment  on  credit-accounts,  as  well  as  the 
fluctuating  popular  demand  for  "change"  and  for 
other  personal  payments,  which  give  rise  to  drafts  on 
the  bank.  This  adaptation  of  money-supply  to 
May  give  elas-  money-demand  would  be  in  direct 
ticity  to  credit-  support  of  expanding  credit-accounts 
^"^'^^  of  banks,  and  this  use  of  capital  in- 

vestments in  bonds  owned  by  banks  would  admit  of 
a  sudden  increase  or  decrease  in  credit  transactions 
during  a  period  of  fluctuating  demand  of  at  least 
$1,600,000,000,  while  the  greatest  fluctuation  in  the 
accounts  of  National  banks  during  the  last  fifteen 
years  has  been  only  $350,000,000. 


200  THE   BANK  AND   THE   TREASURY 

How  the  Credit- Accounts  of  National  Banks  may  be 

made  Elastic  under  the  Present  Law  without  the 

Use  oj  the  Is  sue- Privilege 

The  possibility  for  elasticity  through  issues  is 
quite  equalled  by  the  possibility  for  elasticity  with- 
out issues.  The  difference  is  this,  that  the  issue- 
privilege  makes  possible  elasticity  of  the  money  cir- 
culation as  well  as  credit  accommodations  without 
importation  and  without  disturbance  of  the  resources 
Elasticity  without  o^  the  Treasury,  while  the  elasticity 
issues  limited  to  provided  for  under  the  Law  without 
credit-accmmis      j^^^^^    ordinarily    would    involve    a 

drawing  down  of  Treasury  resources  and  possibly 
an  importation  of  gold.  The  second  possibility  of 
increasing  elasticity  lies  in  the  privilege  before  dis- 
cussed —  the  privilege  granted  to  the  National  banks 
to  receive  "deposits"  from  the  Government  upon 
the  hypothecation  of  securities  acceptable  to  the 
Treasurer.  The  deposit- (loan)-privilege  is  accorded 
to  National  banks  as  a  means  of  making  the  Treasury 
surplus  available  to  them  for  money-reserves  in  time 
of  need.  It  is  a  happy  supplement  of  the  issue- 
(loan) -privilege. 

This  provision  of  law  under  the  recent  decision  of 
the  Treasurer  allows  the  banks  to  hypothecate  not 
only  United  States  bonds  on  hand,  but  also  other 
"gilt-edge"  securities,  discretion  as  to  the  advances 
to  be  made  being  left  with  the  Secretary.     By  a 


ELASTICITY  POSSIBLE  IN   PRESENT  SYSTEM     201 

proper  use  of  this  privilege  elasticity  may  be  given  to 
the  credit-accounts  of  banks  and  much  relief  may  be 
afforded  to  the  community  seeking  accommodation. 
Such  a  use  of  the  deposit- (loan)-privilege  has  in  it 
Attainable  with-  the  possibility  under  favorable  con- 
out  disturbing  the  ditions  of  making  practically  all  the 
money  mar  e  surplus  capital-resources  of  banks 
(that  may  have  been  conservatively  invested)  im- 
mediately convertible  into  cash,  by  hypothecation, 
when  cash  is  needed  to  keep  up  the  lawful  money- 
reserve  of  banks,  which  in  turn  may  be  used  to  in- 
crease credit-accommodations.  By  such  a  practice 
the  entire  money  surplus  of  the  United  States  Treas- 
ury might  be  used  as  a  subsidiary  money-reserve  to 
the  money-reserves  of  commercial  banks.  This 
added  facility  for  immediate  conversion  of  invest- 
ments into  cash  has  its  chief  significance  in  the  fact 
that,  while  money  may  be  withdrawn  from  the 
Treasury  (at  such  times  as  the  Treasury  may  have 
a  surplus  available)  the  credit-accounts  of  banks  may 
be  expanded  and  adequate  support  may  be  given 
to  them  in  money-reserves  without  appeal  to  the 
money  market  and  without  disturbance  of  money 
rates. 

There  may  be,  however,  few  conditions  favorable 
to  the  use  of  the  Government  deposit  (loan).  The 
hypothecation  of  investments  with  the  Government 
as  security  for  these  loans  (sales  of  money  by  the 
Government  to  the  banks)  depends  upon  the  coinci- 


202  THE  BANK  AND   THE   TREASURY 

dence  of  a  disposable  Treasury  surplus  with  a  bank- 
er's pressing  need.  It  has  happened  that  during 
the  years  1898  to  1902,  with  foreign  importations 
increasing  faster  than  Government  expenditures,  the 
Government  had  a  surplus  of  money  in  its  vaults 
which  was  available  to  the  banks  without  serious 
Conditions  under  inconvenience  to  the  Treasury;  1903 
which  this  would  and  1904  find  other  conditions  preva- 
not  obtain  ^^^^  ^^   ^^^  National  capitol.    The 

same  has  been  true  of  every  period  of  trade  reaction 
and  financial  retraction. 

When  tariffs  have  been  lowered  or  the  American 
commodity  market  has  been  less  favorable  to  impor- 
tation, the  Government  has  not  had  a  large  loanable 
money  surplus.  In  fact,  it  has  usually  happened 
that  during  such  periods  of  depression  the  Govern- 
ment has  not  been  in  a  condition  to  lend  a  helping 
hand  to  private  institutions.     The  situation  has  oft- 

Conditions  under  times  been  reversed.  Deposits  or 
which  disturb-       ,  .        ,  1      .      .  i       i       1 

ances  would  be     ^^^ns  previously  made  to  the  banks 

increased  must  be  recalled  as  a  means  of  meet- 

ing the  deficit  created  by  the  excess  of  expenditures 
over  receipts.  Owing  to  this  fact,  under  the  present 
practice  the  loan-deposit  has  proved  a  somewhat 
dangerous  device.  Under  any  circumstances,  the 
possibility  of  gaining  support  from  the  Government 
is  highly  contingent  and  not  to  be  permanently  re- 
lied on  as  a  safeguard  against  inelasticity.  At 
best  it  must  be  treated  as  an  auxiliary  support,  but 


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ELASTICITY   POSSIBLE   IN   PRESENT   SYSTEM     203 

nevertheless,  at  such  times  as  it  may  be  used,  it 
may  be  one  of  the  most  efficient  supports  to  credit 
conceivable. 

Possibility  under   the  Present   Law   oj   Increasing 

Elasticity   of  both  the  Money  Circulation  and 

of  Credit-Accounts  through  the  Loan  Market 

There  is  under  the  present  system  a  third  possi- 
bility of  making  capital  assets  in  the  form  of  redemp- 
tion equipment  immediately  convertible  into  cash 
without  forcing  a  contraction  of  commercial  accom- 
modations. This  possibility  lies  in  the  practice  of 
so  using  the  invested-reserve  as  to  make  it  an  instru- 
ment of  immediate  conversion  in  the  loan  market 
itself.  The  general  loan  market  is  the  third  resort 
for  a  National  bank,  but  it  is  available  to  all  banks 
and  persons  doing  a  banking  business.  A  bank 
which  finds  its  money-reserves  running  low  may 
obtain  relief  from  other  banks  in  the  community  by 
hypothecation  or  by  sale,  unless  these  other  banks 
Elasticity  through  ^^^  under  similar  constraint,  in  which 
convertible  invest-  case  banking  relief  must  come  from 
^^^■^  outside.    The  condition  precedent  to 

such  a  use  of  the  money  market,  with  its  powers  of 
money  importation,  is  an  adequate  unencumbered 
invested-reserve.  If  a  bank  has  an  adequate  amount 
of  "gilt-edge"  capital  assets  it  may  at  all  times 
obtain  money  to  support  an  expansion  in  its  credit- 
accounts,  whether  or  not  it  has  Government  "issue" 


204       THE  BANK  AND  THE  TREASURY 

and  "deposit"  privileges.  For  such  an  institution 
the  problem  of  elasticity  is  solved. 

This  elasticity  may  come  through  the  employment 
of  idle  funds  already  in  the  community  or  by  a 
process  of  money  importation  from  the  outside 
world.  In  a  large  banking  community  there  are 
always  to  be  found  many  customers  of  banks  and 
other  persons  having  accounts  or  claims  against 
other  financial  institutions  in  the  immediate  locality 
who  are  willing  to  exchange  these  accounts  or  claims 
Possibilities  for  good  investments.  The  induce- 
without  appeal  to  ment  which  brings  out  these  funds 
the  market  ^^^  makes  them  available   for  cur- 

rent use  is  the  offer  of  increased  investment  return.  A 
bank  which  needs  .SsOjOoo  in  money,  by  offer  of  an 
increased  rate  of  interest  may  find  among  its  own 
customers  (depositors)  those  who  are  willing  to  pur- 
chase $200,000  of  the  bank's  "bills  payable"  or 
time-notes  secured  by  stocks,  bonds,  or  other  avail- 
able assets,  the  effect  of  which  would  be  not  to  in- 
crease its  money-reserves  but  to  reduce  its  outstand- 
ing credit-accounts  (deposits)  of  customers.  Such 
an  adjustment  would  relieve  the  strain  on  its  money- 
reserves  without  restricting  its  commercial-accom- 
modations. Again,  through  bankers  or  otherwise, 
the  bank  might  find  customers  (depositors)  of  other 
institutions  who  were  willing  to  purchase  $50,000  of 
its  "bills  payable,"  secured  by  the  hypothecation 
of  reserve  capital-investments.     Such  a  disposition 


ELASTICITY   POSSIBLE   IN   PRESENT   SYSTEM     205 

would  have  the  effect  of  giving  to  the  bank  hypoth- 
ecating  its    securities   credit-claims    against    other 

institutions  amounting  to  $50,000, 
How  the  market       ,  .  ,  .      •  1  i.     i.  t.    1. 

is  reached  which  amount  might  at  once  be  trans- 

ferred to  its  own  vaults.  This  would 
put  the  bank  in  a  position  to  support  outstanding 
commercial-accommodations  without  calling  loans. 
The  great  investment  companies,  old  line  insurance, 
savings  banks,  etc.,  have  large  current  means  that 
may  be  made  available  by  secured  loans.  By  similar 
process,  when  the  domestic  loan  market  may  not 
furnish  the  desired  money-reserve,  foreign  negotia- 
tions might  set  up  a  gold  balance  by  importation. 
But  any  method  of  safely  meeting  money-demands 
requires  an  adequate  unencumbered  capital  reserve; 
adequate  support  to  commercial  banks  by  the  loan 
market  and  investment  companies  would  require  the 
discontinuance  of  paying  interest  on  deposits  by 
which  commercial  banks  in  ordinary  time  borrow  all 
available  funds  of  these  institutions. 

One  Obstacle  in  the  way  of  Elasticity  without  Legal 
Enactment 

As  has  been  suggested,  the  elasticity  to  be  given  to 
the  circulating  medium  of  the  country,  whether  in  the 
form  of  money  or  in  the  form  of  credit-accounts,  must 
come  by  cooperation  of  the  many  banks  of  the 
National  system.  It  is  in  this  that  the  improbability 
of  securing  such  a  result  as  that  outlined  obtains 


206      THE  BANK  AND  THE  TREASURY 

In  the  first  place,  the  banks  do  not  do  business  that 
way.  In  view  of  this  fact,  even  if  a  majority  of 
bankers  were  of  the  opinion  that  such  a  change 
might  be  advantageous,  they  would  not  be  willing  to 
alter  their  methods  unless  general  cooperation  were 
assured.  Against  a  change  which  would  have  such 
a  degree  of  uniformity  as  would  insure  the  elasticity 
Voluntary  co-  desired  is  set  all  of  the  force  and 
operation  to  this  inertia  of  custom  —  a  factor  which 
end  improbahle     ^^^^^^^^  ^^e  strong  arm  of  law  and 

the  closest  supervision  of  Government  to  overcome. 
In  the  second  place,  a  very  large  majority  of  bankers 
have  not  this  view  of  the  case.  In  fact,  judging  from 
expressions  made,  many  influential  bankers  would 
favor  changes  in  method  which  would  still  further 
lower  the  percentage  of  capitalization  required  to 
business  transacted.  In  the  third  place,  to  effect 
such  cooperation  in  the  interest  of  the  greater  elas- 
ticity needed,  certain  practices  and  collateral  em- 
ployments of  banking  capital  would  have  to  be 
abandoned.  There  has  been  a  growing  tendency 
toward  underwriting.  The  class  of  securities  com- 
monly underwritten  is  not  such  an  investment  of 
capital  as  contributes  to  elasticity.  There  has  been 
a  growing  tendency  toward  banking  consolidation, 
by  which  the  surplus  capital  of  controlled  banks  is 
loaned  to  (deposited  with)  the  controlling  bank, 
without  any  increase  in  capital  strength  being 
effected  through  the  consolidation.     Investments  in 


ELASTICITY  POSSIBLE  IN  PRESENT   SYSTEM     207 

the  accounts  of  "central"  banks  may  lend  them- 
selves to  the  purposes  of  an  individual  bank  or 
group  under  ordinary  circumstances,  but  conversion 
of  these  investments  into  money  to  support  local  de- 
mands weakens  the  credit-support  at  the  centre. 
Such  a  disposition  of  capital  does  not  contribute  to 
elasticity  in  the  banking  system  as  a  whole.  In  fact, 
it  has  two  effects  directly  opposed  to  elasticity  and 
soundness:  (i)  it  weakens  the  capitalization  of  "cen- 
tral" banks,  and  (2)  it  ties  up  the  capital  of  the 
"depositing"  bank  in  such  a  way  as  to  render  it 
difficult  to  bring  money  into  the  system  from  without 
as  a  means  of  meeting  increasing  demands. 


Chapter  XVI 

POSSIBILITIES  OF  INCREASING  ELASTICITY  BY  SIMPLE 
MODIFICATIONS   OF   THE  PRESENT  LAW 

Elasticity  is  the  need  —  the  problem  is  to  supply- 
it.  To  re-state  a  conclusion  reached  in  the  preceding 
chapter,  the  present  system  will  admit  of  an  adequate 
measure  of  elasticity  if  bankers  were  brought  into 
cooperation  to  this  end.  The  impelling  force  in  the 
present  practice  —  a  practice  which  stands  in  the 
way  of  cooperative  results  —  is  the  constant  desire  to 
lower  capital-cost  of  banking  operation.  This  mo- 
tive must  be  reckoned  with.  It  is  ever-present  in  all 
The  need  for  forms  of  business.  It  is  the  desire  to 
legislation  to  se-    obtain  the  largest  income  possible  at 

aire  cooperation  •  v  i         i.         j  i- 

^  a  given  capital-cost  and  current-ex- 

pense that  gives  point  to  the  administrative  devices 
of  every  institution  conducted  for  gain.  It  has  been 
the  effort  to  lower  cost  and  to  increase  profits  (at 
times  ill-directed)  that  has  made  necessary  legisla- 
tion for  the  inspection  of  mines  and  factories,  and  for 
the  introduction  of  safety  appliances  to  the  physical 
equipment  of  enterprise. 

The  same  necessity  lies  back  of  the  present  need 
for  legislation  requiring  greater  business  safety  or 

[208] 


MODIFICATIONS  TO   INCREASE  ELASTICITY      209 

"soundness"  in  the  redemption  equipment  of  com- 
mercial banks  as  a  means  of  securing  increased  elas- 
ticity and  better  banking  service.  It  is  through 
compulsory  legislation  that  a  uniform  practice  may 
be  introduced.  Under  circumstances  of  competi- 
To  benefit  the  ^ion,  reforms  which  require  an  in- 
bank  as  well  as  crease  in  capital-cost  can  be  attained 
the  piMk  .^  ^^  ^^^^^  ^^y_     ^j^g  ^j.jf^  Q^  ^^^ 

banking  legislation  of  the  past  has  been  toward  the 
imposition  of  requirements  that  will  bring  to  the 
public  protection  against  insolvency  of  individual 
banks.  The  demand  of  to-day  is  protection  against 
the  operation  of  the  system  as  a  whole  —  the  con- 
traction of  credit-accommodation  as  a  means  of 
protecting  the  banks.  And  as  past  legislation  must 
be  recognized  as  of  advantage  to  the  banker  as  well 
as  to  the  public,  the  same  result  may  be  predicated 
of  a  further  evolution  of  our  system  of  commercial 
credit  to  adapt  it  to  the  increased  needs  for  a  more 
sound  and  a  more  elastic  medium  of  exchange. 

Changes  in  the  Law  to  Increase  the  Soundness  of 
Credit-Accounts 

In  the  many  plans  proposed  for  increasing  the 
elasticity  of  bank-issues  and  bank-credit,  the  element 
of  the  business  safety  of  the  latter  has  been  ignored. 
An  underlying  fallacy  has  been  entertained,  viz., 
that  the  problem  of  elasticity  may  be  solved  without 
increasing  the  financial  strength  of  those  institutions 


210       THE  BANK  AND  THE  TREASURY 

offering  current  credit-accounts  for  sale.  But  in- 
creased financial  strength  must  come  at  a  cost. 
Greater  soundness  of  credit  can  be  had  only  through 
reinforced  redemption  equipment  for  meeting  the 
demands  for  money  payment,  and  redemption  equip- 
ment must  be  procured  by  capital  investment. 
Larger  and  better  facilities  for  rendering  banking 
service  are  made  possible  only  by  means  of  stronger 
and  improved  machinery  for  credit  support.  In 
banking,  as  in  other  undertakings,  experience  has 
taught  the  lesson  that  without  adequate  capital-re- 
sources both  the  institution  and  the  public  may 
suffer  many  times  more  than  the  price  of  safety. 
Initial  capital  cost  of  equipment,  however,  must  be 
met,  and  met  by  those  who  undertake  the  banking 
business. 

An  Amendment  oj  the  '^ Money-Reserve^^  Section  of 
the  Bank  Act 

The  first  change  in  the  Law  looking  toward  in- 
creased elasticity  is  one  which  would  require  in- 
creased capitalization  and  at  the  same  time  would 
take  away  the  inducement  to  invest  the  capital  surplus 
of  the  bank  in  a  comparatively  weak  and  dangerous 
form  of  redemption  equipment.  The  oft-repeated 
recommendation  of  Comptrollers  and  of  financial 
writers  for  the  repeal  of  those  sections  of  the  Bank 
Act  which  permit  one  bank  to  loan  a  portion  of  its 
capital  to  another  at  interest  is  here  invoked  —  a 


MODIFICATIONS   TO   INCREASE   ELASTICITY       211 

repeal  of  the  clauses  pertaining  to  "reserve  deposits." 
It  is  unnecessary  to  re-state  the  dangerous  character 
Re-statement  of  of  this  device,  —  that  a  "deposit"  is 
defects  in  "re-  a  loan;  that  a  loan  is  a  sale  of  money 
serve"  law  ^^^  ^j.^^^.  ^j^^^  ^^le  "reserve  deposit" 

at  best  cannot  be  more  than  a  capital  investment,  but 
too  often  is  obtained  by  exchange  of  credit;  that  in 
times  of  money  strain  it  shifts  the  burden  from  one 
bank  to  another;  that  such  a  device  does  not  permit 
of  the  use  of  capital  to  effect  an  increase  in  the 
money-reserves  of  banks  or  an  expansion  of  credit 
with  safety;  that  it  hampers  the  operations  of  the  use 
of  bank  capital  in  such  a  manner  as  to  make  elasticity 
in  money  circulation  and  in  current  credit-funds  of 
the  nation  impossible. 

A  deposit  with  another  bank  for  the  purpose  of  meet- 
ing exchange  balances  may  be  properly  considered  a 
part  of  the  "cash"  requirement,  but  for  obvious 
reasons  it  may  not  with  public  safety  be  considered 
Effect  of  prohibit-  as  a  partof  the"invested-reserve."  In 
ing  interest  on  so  far  as  a  deposit  with  another  bank 
^^^^^  ^  is  considered  as  cash,  the  use  of  capi- 

tal for  the  purpose  of  obtaining  such  accounts  should 
be  restricted  to  the  need  for  redemption  of  exchanges ; 
this  restriction  may  be  effected  through  the  Act  by  a 
prohibition  restraining  one  bank  from  paying  interest 
on  the  "deposits"  (loans)  of  another.  As  has  been 
before  pointed  out  by  financial  writers,  such  a  pro- 
hibition would  take  away  the  inducement  to  this 


212  THE   BANK    AND    THE    TREASURY 

form  of  investment  of  capital  surplus.  Without  an 
income  inducement,  a  bank  would  carry  no  larger 
deposits  with  other  banks  than  would  actually  be 
needed  for  an  exchange  base.  Besides,  in  case  a 
commercial  bank  were  not  permitted  to  pay  interest 
on  deposits,  there  would  be  no  inducement  for  trust 
companies,  savings  banks,  and  insurance  companies 
to  carry  large  credits  with  them.  Or,  to  put  the 
same  relation  in  another  form,  the  commercial  banks 
would  not  become  borrowers  of  money  from  these 
institutions  as  a  means  of  supplying  themselves  with 
''money-reserves"  to  meet  ordinary  demands  of  cus- 
tomers on  credit-account.  Such  a  complete  segre- 
gation of  the  funds  of  institutions  of  current  account, 
from  investment  institutions,  would  do  much  to  give 
stability  to  general  financial  conditions.  The  in- 
vestment institutions  would  carry  a  line  of  short- 
time  papers,  to  be  sure,  and  among  these  short-time 
investments  might  be  secured  bills  payable  and  re- 
discounts of  commercial  banks.  But  such  a  practice 
would  make  the  current  revenue  of  investment  insti- 
tutions an  auxiliary  support  to  the  commercial  banks 
when  support  were  needed,  instead  of  making  the 
commercial  banks  the  money  market  as  well  as  the 
credit  market,  a  plan  which  would  make  the  various 
investment  institutions  and  the  Treasury  of  the 
United  States  independent  and  prominent  factors  in 
the  money  markets,  and  do  much  to  place  the  banks 
in  a  position  to  gain  support  for  the  credit  market. 


MODIFICATIONS   TO   INCREASE  ELASTICITY      213 

The  "reserve"  Law  as  it  stands  has  proceeded 
from  a  popular  misconception  that  a  bank  "deposit" 
is  an  amount  of  money  owned  by  the  depositor. 
Misconception  as  This  fallacy  is  made  use  of  by  banks 
to  meaning  of       themselves  in  their  dealings  with  cus- 

epost  tomers,  and  by  customers  in  thinking 

about  banks.  A  familiar  instance  of  such  use  is  seen 
in  advertisements  of  the  financial  condition  of  banks 
as  a  means  of  soliciting  public  confidence  in  their 
paying  ability.  In  almost  any  banking  journal  such 
a  display  as  this  may  be  found: 

THE   FIRST   NATIONAL   BANK   OF    ECONOMY    FALLS 

Capital $100,000 

Surplus 100,000 

Total  Capital  and  Surplus $200,000 

Deposits $1,500,000 

The  above  is  assumed  to  be  a  statement  of  financial 
strength.  If  the  advertisement  were  written  to 
speak  the  truth  it  would  be  something  as  follows: 

Capital  and  Surplus $  200,000 

Call  Loan  Indebtedness i  ,500,000 

Excess  of  Demand  Indebtedness  over  Capital 1,300,000 

A  credit-account  to  a  customer  is  a  contract  for  the 
future  delivery  of  money  —  a  deal  in  "futures." 
The  bank  sells  to  its  customers  (so-called  depositors) 
its  contracts  for  the  future  delivery  of  money.  These 
contracts  are  due  on  "call."  They  have  not  even 
the  time  usual  on  boards  of  trade  and  stock  ex- 
changes where  "puts"  and  "calls"  are  dealt  in.     In 


214      THE  BANK  AND  THE  TREASURY 

stock  transactions  a  "future"  is  usually  entitled  to 
at  least  one  day's  notice  before  delivery  is  to  be  made. 
''Deposit"  an  Institutions  of  commercial-credit  do 
investment  in  not  reserve  this  privilege,  and  if  they 
ju  ures  ^j^  make  such  reservation  the  utility 

of  their  credit  to  customers  as  current  funds  would 
be  destroyed ;  they  would  stand  in  the  same  position 
as  savings  institutions.  The  commercial  bank  must 
deliver  at  once,  without  notice,  or  admit  its  insol- 
vency, and  with  such  admission  sacrifice  all  claims 
to  public  confidence  as  a  basis  for  future  credit  sales. 
After  several  decades  of  experience  we  established 
a  law  requiring  banks  to  keep  a  certain  minimum  pro- 
portion of  money-reserves  to  demand-credit  outstand- 
ing. A  prescribed  ratio  of  "cash"  to  credit-accounts 
outstanding  should  be  established  —  "cash"  to  in- 
clude both  money-reserves  and  exchange-balances. 
It  should  be  permitted,  however,  that  these  may  be 
used  for  the  satisfaction  of  immediate  demands. 
Should  require  ^ut  the  law  should  also  require  that 
cash-reserve  pro-  this  "cash  "-reserve,  including  money 
vided out  oj  capital  ^^^  exchange-balances,  should  be 
provided  out  of  capital.  It  should  further  require 
that  every  subsequent  increase  in  credit-obligations 
should  be  supported  by  "cash"  provided  by  capital 
investment.  Such  an  amendment  would  prevent  an 
expansion  of  credit  beyond  ability  to  support  it,  and 
would  be  equivalent  to  saying  that  a  bank  should 
capitalize    its   maximum   instead    of   its   minimum 


MODIFICATIONS  TO  INCREASE  ELASTICITY      215 

credit-redemption  requirements.  As  a  result  of  such 
an  amendment  the  bank  itself,  to  increase  its  own 
income,  would  see  to  it  that  such  portion  of  its  re- 
demption equipment  as  was  not  immediately  needed, 
when  credit-demands  were  not  at  a  maximum,  was 
invested  in  assets  immediately  convertible  into  cash. 
An  amendment  of  this  one  feature  of  the  Bank  Act 
by  repeal  and  by  substitution  of  a  provision  author- 
izing the  banks  to  invest  their  surplus  capital-re- 
sources in  first-class  marketable  securities  only,  to 
be  accounted  as  an  ''in vested-reserve"  and  to  be 
considered  as  a  part  of  the  redemption  equipment 
held  as  a  basis  for  credit  support,  would  at  once  add 
over  $400,000,000  to  the  assets  of  National  banks 
Increase  in  das-  available  to  procure  money  by  sale 
ticity  0}  money-re-  or  by  hypothecation  without  disturb- 
servesasaresuU  j^^  ^^^  ^^^^-^  relations  of  Other  insti- 
tutions. Such  a  change  would  greatly  increase  the 
possibilities  of  credit  expansion  in  time  of  need. 
This  increased  strength  of  equipment  can  come  from 
the  superiority  of  investments  of  present  capital  em- 
ployed as  banking  equipment.  In  every  other  rela- 
tion the  Law  has  recognized  the  investment  of  one 
bank  in  the  liabilities  of  another  as  a  policy  not  to  be 
supported.  Commercial  banking  institutions  have 
failed,  and  until  such  a  change  is  made  they  always 
will  fail,  to  support  an  extraordinary  strain  which  is 
general  enough  to  reach  the  central  bank.  The 
present  reserve  provisions  always  have  operated  and, 


216      THE  BANK  AND  THE  TREASURY 

under  similar  conditions,  must  operate  to  force  a 
reduction  of  loans  with  increased  money-demand. 

Moreover,  such  an  amendment  of  this  feature  of 
the  Bank  Act  would  take  out  of  the  National  banking 
system  at  the  reserve  centres  over  $400,000,000  of 
money  that  is  now  held  there  as  an  invested-reserve, 
but  which  is  used  by  these  central  banks  for  the 
support  of  a  much  larger  volume  of  credit  represented 
Increased  inde-  ^  call-loans  and  other  speculative 
pendence  of  indi-  assets  —  a  kind  of  security  that  is  of 
vidual  hanks        jj^^^^  ^^^  ^^  ^^^  j^j^^^  ^^  business  that 

should  be  supported  by  commercial  banking  capital. 
The  "call-loans"  of  National  banks,  as  well  as  the 
call-loans  of  other  institutions  which  depend  on  the 
money-reserves  of  National  banks,  are  speculative 
loans.  These  loans  are  usually  incurred  as  a  means 
of  carrying  on  margin  speculation.  This  is  about 
the  only  kind  of  business  to  which  a  call-loan  is 
adapted.  Under  the  present  practice  the  National 
bank  has  become  the  mainstay  to  the  speculator.  In 
an  emergency  the  National  bank  finds  itself  at  times 
tied  hand  and  foot  with  the  man  whose  only  interests 
lie  in  market  fluctuations  instead  of  in  producing 
goods  and  marketing  them.  When  gradual  liquida- 
tion may  be  effected  the  banker  may  protect  his 
commercial  constituents  against  the  speculative 
judgments  of  professional  traders.  On  the  other 
hand,  when  the  strain  is  sudden  and  danger  is  immi- 
nent these  call-loans  may  not  be  made  available  to 


MODIFICATIONS  TO  INCREASE  ELASTICITY      217 

protect  commercial-credits.  But  even  if  by  forcing 
liquidation  the  banker  is  able  to  preserve  his  own 
institution  intact,  the  result  is  a  shock  to  the  commu- 
nity and  it  reacts  unfavorably  on  commercial  and 
industrial  enterprise. 

Repeal  of  the  provisions  referred  to  would  not  only 
increase  the  elasticity  of  commercial-credit-accounts 
but  would  also  purge  the  commercial  bank  of  its 
most  dangerous  constituency.  It  would  compel  the 
speculator  to  seek  call-loan  accommodation  with 
institutions  and  agents  specially  capitalized  and 
equipped  for  such  service.  Such  a  change  in  the 
Would  purge  sys-  Law  would  also  require  the  conserva- 
tem  oj  dangerous  tive  banker  to  seek  other  investments 
cons  I  uency  ^^^  j^j^  surplus  money-reserves,  and  by 
this  means  would  leave  intact  the  capital-resources 
of  commercial  banks  for  commercial-credit  support. 
It  would  tend  to  break  down  the  practice  of  comming- 
ling capital  assets  of  banks,  would  place  each  indi- 
vidual institution  on  a  more  independent  footing,  and 
would  sever  the  bonds  which  have  so  frequently 
dragged  all  down  into  a  common  pool  through  the 
weakening  or  breaking  of  some  central  support. 
The  individual  banker  would  be  banking  on  money- 
reserves  and  "gilt-edge"  investments  instead  of 
basing  his  own  credit  on  the  credit  of  other  banking 
institutions  which  in  turn  look  to  speculative  or 
other  customers  for  support  in  emergency  —  a  system 
which  brings  the  results  of  bank-credit  over-expan- 


218       THE  BANK  AND  THE  TREASURY 

sion  down  on  the  heads  of  those  engaged  in  commerce 
and  industry. 

Amendment  Requiring  a   Minimum   Proportion  oj 
Redemption  Equipment  to  Maximum  oj  Credit- 
Obligations  Outstanding 

An  amendment  directed  toward  adequacy  in  capi- 
tahzation  would  not  be  complete  without  a  clause 
requiring  a  prescribed  proportion  of  ''redemption 
equipment"  to  the  maximum  credit-funds  disposed 
of  for  the  accommodation  of  customers.  As  a  mat- 
ter of  public  safety  a  bank  should  not  be  permitted 
to  incur  credit-obligations  in  excess  of  a  prescribed 
ratio  to  unimpaired  capital.  That  is,  instead  of  the 
money-reserve  being  a  criterion  by  which  to  gauge  the 
soundness  of  credit-accounts,  the  law  should  adopt  the 
measure  of  unimpaired  capital  available  for  redemp- 
tion purposes.  Such  an  amendment  would  have  the 
Controlling  controlling  effect:  (i)  Of  imposing  on 

effect  oj  such  an  the  Comptroller  of  the  Currency  the 
amen  men  inquiry  as  to  what  part  of  a  bank's 

capital  is  tied  up  in  ''banking-house  and  fixtures," 
in  "real-estate,"  in  "mortgages,"  and  in  "other  in- 
vestments" not  available  for  the  support  of  credit- 
accounts,  such  as  "underwriting,"  etc. ;  (2)  of  making 
it  the  duty  of  the  Comptroller  of  the  Currency  and  of 
examiners  to  inquire  into  the  amount  of  capitaliza- 
tion remaining  after  procuring  "redemption  equip- 
ment"; (3)  of  requiring  a  specific  accounting  for  the 


MODIFICATIONS   TO  INCREASE  ELASTICITY       219 

character  of  "redemption  equipment"  held  —  what 
portion  in  cash,  what  portion  in  investments  —  and 
as  to  cash,  what  portion  is  held  in  the  form  of  money- 
reserves,  and  what  portion  in  the  form  of  exchange 
accounts;  (4)  of  compelling  a  report  in  such  form 
that  this  total  redemption  equipment  may  be  com- 
pared with  the  maximum  of  credit-obligations  to  be 
redeemed.  At  present  no  question  is  raised  so  long 
as  the  money-reserve  bears  the  prescribed  proportion 
to  '^deposits."  This  money-reserve  may  have  been 
borrowed;  it  may  be  swelled  by  padded  or  "mutual" 
balances. 

The  bank's  capitalization  may  be  inadequate  to 
support  even  the  minimum  of  credit-accounts.  No 
inquiry  is  made  as  to  the  character  of  redemption 
equipment  other  than  cash.  In  fact,  a  Comptroller 
of  the  Currency  has  been  known  to  say  that  so  long 
as  the  loans  of  a  bank  are  good  there  is  little  need  for 
investigating  further.  A  prominent  banker  also  an- 
nounces as  his  belief  that  if  the  cash-reserve  is  kept 
intact  it  is  of  less  importance  to  know  that  the  "stock, 
bonds,  and  other  securities"  held  are  properly  repre- 
sented in  financial  statements  than  that  the  "com- 
mercial assets"  are  not  to  be  written  down.  These 
Need  for  a  change  opinions  have  in  them  much  of  truth, 
in  the  principle  but  not  for  the  reasons  assigned.  It 
of  control  j^  necessary  that  loans  be  good,  for  the 

reason  that  any  loss  on  this  or  on  any  other  account 
is  a  capital  loss.   There  can  be  no  other  kind  of  loss  in 


220      THE  BANK  AND  THE  TREASURY 

a  going  business ;  only  an  insolvent  can  saddle  losses 
on  creditors.  Assuming  that  all  the  "commercial 
assets"  are  good,  a  bank  having  capital-assets  which 
are  unavailable  and  of  questionable  character  (while 
it  may  be  able  to  liquidate  on  "winding  up")  will  not 
as  a  "going  concern"  make  an  efficient  banking 
institution.  In  case  the  money-reserves  are  not  pro- 
vided for  out  of  the  capital,  the  bank  is  a  constant 
menace  to  the  community.  As  a  going  concern 
every  extraordinary  demand  will  be  forced  on  cus- 
tomers, and  the  community  will  experience  a  peri- 
odical restriction  in  funds  available  for  current  use 
such  as  will  make  commercial  judgments  uncertain 
and  enterprise  extra-hazardous.  It  is  to  remedy  just 
this  defect  in  our  present  banking  system  that  the 
present  agitation  for  elasticity  is  being  carried  on. 
The  Law  must  have  regard  for  public  welfare  rather 
than  the  solvency  or  insolvency  of  an  individual  bank. 

An  Amendment  oj  the  Bank  Act  to  Enjoin  the  Pay- 
ment of  Interest  on  "/55W€5"  to  Banks 

A  third  change  in  the  Law  in  the  interest  of  elas- 
ticity has  been  suggested.  Writers  and  publicists 
have  called  attention  to  the  fact  that  underneath  the 
present  Law  a  small,  almost  nominal  tax  is  imposed 
on  issues.  Throughout  the  course  of  banking  legis- 
lation, and  in  most  of  the  recent  proposals  directed 
toward  reform,  an  assumption  has  run  that  both  the 
bank  and  the  Government  may  use  the  same  capital 


MODIFICATIONS   TO  INCREASE  ELASTICITY      221 

at  the  same  time,  without  weakening  the  resources  of 
either.  The  Government  is  in  need  of  gold.  It 
offers  its  bonds  for  sale,  and  as  a  means  of  availing 
itself  of  a  better  market  holds  out  to  the  bank  an 
inducement  to  buy.  The  inducement  offered  the 
bank  to  part  with  its  gold  is  this :  That  the  bank  may 
continue  to  receive  the  interest  on  the  bond  and  at 
the  same  time  have  its  face  value  in  notes  to  use  as 
money.  In  this  transaction  the  presumption  is  that 
the  notes  will  not  serve  as  an  elastic  medium;  the 
presumption  is  rather  that  the  amount  of  notes  issued 
will,  at  once,  be  added  to  the  permanent  stock  of 
money  in  circulation.  The  present  nominal  tax  is 
based  on  the  same  theory  as  the  plan  of  issue  —  a 
high  tax  on  notes  would  reduce  the  inducement  to 
purchase  bonds  and  in  like  degree  would  depress  the 
bond  market.  The  ten  per  cent  prohibitive  tax  on 
State  bank  issues  proceeds  from  the  same  conclusion. 
The  bond  market  is  no  longer  a  matter  of  public 
concern.  On  the  other  hand,  an  elastic  currency  is 
an  end  desired.  If,  in  the  framing  of  a  banking  law, 
all  question  of  Government-credit  were  abandoned, 
and  a  tax  were  laid  on  issues  (or  interest  were  charged 
on  the  Government  loan  of  "issues")  for  the  purpose 
A  use  oj  the  in-  of  regulating  their  use  to  meet  the 
terest  rate  to  regit-  extraordinary  money-demand — if,  in 
late  circulation  ^^^^^  ^^^^^^  ^^  ^j^^^j^  currency  in- 
stead of  a  bond  market  were  made  the  object  of  legis- 
lation —  it  is  contended  that  elasticity  may  be  at- 


222       THE  BANK  AND  THE  TREASURY 

tained  without  abandoning  the  principle  of  safety 
found  in  a  secured  note  circulation.  For  purposes  of 
illustration,  let  us  assume  that  the  varying  needs  for 
money  during  the  year  did  not  fluctuate  more  than 
$300,000,000.  Then  the  use  of  the  $449,000,000  of 
bank-notes  already  outstanding  might  be  regulated 
by  interest  charges  as  follows:  Issues  (loans)  to  the 
extent  of  five  per  cent  of  the  capital  of  National  banks 
or  an  amount  ample  to  cover  the  active  accounts  of 
disbursing  officers  might  be  at  the  rate  of  one  per 
cent  as  compensation  for  the  use  of  the  banks  as 
disbursing  agents  of  the  Government.  Such  a  low 
interest  rate  on  a  small  portion  of  the  "issues"  would 
also  have  the  effect  of  keeping  a  small  amount  of 
"issues"  in  circulation  to  guarantee  the  ready  ac- 
ceptance of  the  bank-note  by  customary  use.  The 
balance  (something  over  $400,000,000)  might  be 
charged  for  at  a  rate  which  would  make  this  amount 
of  authorized  issues  an  emergency  money-reserve. 
To  follow  this  principle  of  regulation  a  little  further, 
a  portion  of  the  $400,000,000  reserve  medium  (let  us 
say  two-thirds)  might  be  taxed  at  a  rate  slightly 
above  the  usual  commercial  paper  rate,  and  the  re- 
mainder at  a  still  higher  rate  to  preclude  its  use 
except  when  the  emergency  became  extreme. 

The  proposition  is  not  a  new  one.  The  principle 
has  been  several  times  proposed  under  the  name  of  a 
"tax,"  but  has  met  with  little  support.  The  banks 
have  not  favored  it  for  obvious  reasons;  the  public 


MODIFICATIONS   TO   INCREASE   ELASTICITY      223 

has  not  seen  the  need  for  such  a  restriction  on  the 
issue  of  notes  by  banks  as  will  take  them  out 
Why  proposition  ^^  ^^^  permanent  money  stock  and  at 
has  not  received  the  same  time  force  the  banks  to 
suppor  strengthen  their  capital-resources  (i.e., 

to  require  them  to  do  business  on  their  own  capital, 
under  extraordinary  as  well  as  ordinary  conditions) ; 
they  have  not  considered  the  necessity  of  compelling 
the  less  provident  of  commercial  banking  institutions 
to  furnish  out  of  their  own  capital-funds  a  redemption 
equipment  strong  enough  to  make  secure  their  credit- 
accounts  (so-called  deposits). 

The  Strength  and  the  Weakness  oj  Secretary  Shawns 
Proposal 

Financial  disturbances,  between  1902  and  1904 
lend  force  to  the  reasoning  which  lies  back  of  such  a 
demand.  Secretary  Shaw  in  an  address  before  the 
National  Association  of  Merchants  and  Travelers  at 
Chicago  has  become  an  open  advocate  of  the  prin- 
ciple. ''If  I  were  given  authority  to  formulate  a 
measure  that  would  provide  the  requisite  elasticity 
Elastic  medium  ^o  our  present  currency  system,"  says 
equalto  so  per  cent  Mr.  Shaw,  "I  think  I  would  add 
ofcollateralissnes^^  amendment   permitting  National 

banks,  with  the  consent  of  the  Comptroller  of  the 
Currency,  to  issue  a  volume  of  circulating  notes  equal 
to  fifty  per  cent  of  the  bond-secured  circulation,  at  a 
tax  of  six  per  cent,  the  same  to  be  retired  at  will  (by 


224  THE   BANK   AND   THE   TREASURY 

the  banks)  or  by  direction  of  the  Comptroller,  by  the 
deposit  of  an  equal  amount  of  lawful  money,  with 
any  Sub-Treasury." 

Predicting  the  result  of  such  a  measure  in  elas- 
ticity. Secretary  Shaw  continues:  "Three  things  I 
know:  First,  this  additional  circulation  would  spring 
Government  in-  i^^o  existence  almost  instantly  when- 
surance  to  elastic  ever  and  wherever  interest  rates  ad- 
medtum  vanced  to  the  point  of  profit.     Second, 

it  would  as  promptly  retire  whenever  interest  rates 
became  normal.  Third,  it  would  be  absolutely  safe, 
—  as  good  as  the  present  National  bank-issue,  and 
with  a  slight  change,  identical  in  form  and  appear- 
ance, —  for  the  Government,  amply  protected  by  the 
six  per  cent  tax,  would  underwrite  it." 

In  this  we  have  stated  the  principle  of  a  current 
charge  on  "issues"  for  regulation  of  that  part  of  the 
money  medium  which  we  would  have  respond  to  the 
fluctuating  needs  that  could  be  met  by  ordinary 
dealings  in  the  market.  The  charge,  however,  is  to 
be  in  the  nature  of  a  premium  paid  for  insurance. 
In  this  we  have  a  partial  abandonment  of  the  prin- 
Still  dings  to  old  ciple  of  "banking  on  the  capital-re- 
idea  oj  support  to  sources  of  the  bank."  The  collater- 
hond  market  ally-secured  note  is  still  to  serve  as  a 
part  of  the  permanent  money-supply,  and  the  elastic 
medium  is  to  gain  its  "soundness"  from  Govern- 
ment underwriting.  In  other  words.  Secretary  Shaw, 
while   announcing  the   principle   of  elasticity,   still 


MODIFICATIONS   TO   INCREASE   ELASTICITY      225 

clings  to  the  idea  of  bank-note  issues  for  the  support 
of  the  bond  market,  instead  of  Hmiting  ''issues" 
through  banks  to  the  fluctuating  money  needs  of  the 
country. 

An   Amendment    of   the    Bank    Act    to    Encourage 

Investment  of  Surplus  Capital  in  ^^Gilt-Edge^^ 

Securities 

To  the  above  principles  of  emergency  currency 

may  be  urged  the  objection  that,  from  motives  of 

business  profit,  the  banks  would  very  largely  reduce 

their  circulation,  and  reduce  the  holdings  of  United 

States  bonds  as  a  basis  for  issue.     Thus,  it  may  be 

said,  such  a  change  as  that  suggested  for  regulating 

issues,  by  interest  requirement,  or  by  means  of  any 

other  current  change  adequate  to  compel  retirement 

of  issues,  would  defeat  its  own  ends.     To  make 

effective  a  collaterally-secured  emer- 
The  inducement  .    j 

to  investment        S^ncy    currency,     some    mducement 

must  be  offered  to  investment  in  the 
kind  of  capital-resources  which  will  be  received  by 
the  Government  as  a  basis  for  issue.  Such  an  in- 
ducement must  be  found  in  the  rate  of  return  which 
the  bank  may  get  on  the  kind  of  investments  of  sur- 
plus money  or  other  capital-resources  that  may  be 
reserved  for  hypothecation  or  sale  to  obtain  money 
when  needed. 

Under  the  present  Law  investments  of  this  kind 
are  limited  to  (i)  United  States  bonds,  as  a  basis  for 


226      THE  BANK  AND  THE  TREASURY 

issue;  (2)  loans  to  (deposits  with)  reserve  agents;  and 
(3)  more  recently,  to  ''gilt-edge"  securities  acceptable 
as  a  basis  for  Government  loans.  As  to  the  first  class 
of  investment  the  banks  get  a  return  belov^  two  per 
cent.  As  to  the  second  class,  the  rate  of  return  is 
from  two  to  three  and  one-half  per  cent;  on  the 
Investments  un-  average  they  are  somewhat  above  two 
der  the  present  per  cent  per  annum.  The  most  prof- 
^^  itable  return  on  "in vested-reserves" 

is  from  those  securities  other  than  Government  bonds 
and  reserve  deposits  — "gilt-edge"  securities  such  as 
have  recently  been  received  by  the  Secretary  of  the 
Treasury  as  collateral  to  "deposit"  loans. 

The  business  advantage  of  investment  of  surplus 
capital-resources  in  this  class  of  securities,  and  the 
unquestioned  soundness  of  the  collateral,  suggest  the 
application  of  provisions  similar  to  those  advocated 
by  Mr.  Aldrich  and  Mr.  Payne  for  the  security  of 
Government  loans  to  the  banks  (Government  de- 
posits). In  a  bill  introduced  in  the  House  of  Rep- 
resentatives by  Mr.  Payne,  February  26,  1903,  it  is 
proposed  that  the  Secretary  of  the  Treasury  accept 
as  collaterals  the  following  securities:  "Bonds  of  the 
United  States,  bonds  or  other  interest-bearing  obli- 
gations of  any  State  of  the  United  States,  or  any 
legally  authorized  bonds  issued  for  municipal  pur- 
poses by  any  city  in  the  United  States  which  has  been 
in  existence  as  a  city  for  a  period  of  twenty-five  years, 
and  which  for  a  period  of  ten  years  previous  to  such 


MODIFICATIONS   TO  INCREASE   ELASTICITY       227 

deposit  has  not  defaulted  in  the  payment  of  any  part 

of  either  principal  or  interest  of  any  debt  authorized 

Amendment  pro-  to  be  contracted  by  it,  and  which  has 
posed  by  Mr  Al-  ^^  ^^^j^  ^^^^  ^^^^  ^^^^  ^^.  ^^^^_ 
drich  and  Mr.  ,  ^        •' 

Payne  sand  inhabitants  as  established  by  the 

last  census,  and  whose  net  indebtedness  does  not 
exceed  ten  per  centum  of  the  valuation  of  the  taxable 
property  therein,  to  be  ascertained  by  the  last  pre- 
ceding valuation  of  property  for  the  assessment  of 
taxes;  or  the  first-mortgage  bonds,  not  including 
street  railway  bonds,  of  any  railroad  company  which 
has  paid  dividends  of  not  less  than  four  per  centum 
per  annum  regularly  and  continuously  on  its  entire 
capital  stock  for  a  period  of  not  less  than  ten  years 
previous  to  the  deposit  of  the  bonds." 

With  the  utmost  safety  the  Treasurer  as  trustee  for 
the  note-holder  and  as  guardian  of  the  principle  of 
"sound  money"  and  "sound  credit,"  might  receive 
any  of  these  investments  as  a  basis  for  issues,  thus 
giving  to  the  banks  a  better  return  than  they  now 
receive  on  loans  of  surplus  capital  to  reserve-agents. 
This  would  furnish  the  inducement  to  the  banks  to 
carry  an  "  in  vested-reserve "  that  might  be  made 
immediately  convertible.  With  such  oppportunity 
given  for  investment  of  surplus  money-reserves,  and 
with  the  imposition  of  a  tax  which  would  insure  that 
issues  would  not  be  put  into  circulation  except  when 
the  money  pressure  was  above  the  ordinary,  both  the 
inducement  to  invest  and  the  convertibility  of  the 


228  THE    BANK    AND    THE    TREASURY 

investment  by  sale  or  by  hypothecation  and  issue 
would  be  secured. 

Amendment  oj  the  Bank  Act  to  Require  Payment  of 
Interest  on  Government  ^' Deposit^ ^  Loans  to  Banks 

The  same  reasoning  as  is  urged  in  support  of  a 
charge  on  "issues"  would  suggest  the  imposition  of 
an  interest  requirement  on  the  banks  for  loans  (de- 
posits) from  the  United  States  Treasury.  What  has 
been  so  carefully  called  "a  deposit"  of  the  Govern- 
ment with  a  bank  is  not  a  deposit  in  any  sense  of  the 
word.  It  is  nothing  more  nor  less  than  a  loan  imthout 
interest.  It  is  a  sale  oj  money  to  the  bank  in  return 
The  profitable  ^^r  which  the  Government  gets  a  de- 
charader  oj  these  mand  credit-claim  against  the  bank 

"■^  secured   by   such   collaterals   as   the 

Treasurer  may  require.  These  so-called  deposits 
may  be  made  immensely  profitable  to  the  bank;  by 
using  the  money  so  purchased  on  credit  and  without 
interest,  as  a  "money-reserve"  the  bank  may  pur- 
chase at  least  four  times  as  much  commercial  paper 
"on-account"  {i.e.,  in  exchange  for  deposits).  For 
this  reason,  it  is  that  only  when  pressure  is  brought 
to  bear  on  the  bank  by  the  Government  that  the 
money  is  turned  back  into  the  Treasury,  where  it 
belongs. 

Instead  of  the  bank  having  an  inducement  to  re- 
lieve its  hypothecated  investment  from  encumbrance 
as  soon  as  the  extraordinary  demand  for  money  is 


MODIFICATIONS   TO   INCREASE  ELASTICITY      229 

past,  there  is  a  continuing  inducement  for  the  bank 
to  stretch  its  credit  to  the  limit  at  times  when  money- 
AnindncemenUo  demands  are  small,  and  then  again  to 
encumber  redenip-  appeal  to  the  Government  for  aid  in 
/ion  equipment      ^j^^  ^f  ^^^^      Another  danger  lies  in 

the  fact  that  the  Government  is  not  in  touch  with  the 
commercial  world  except  when  appeals  are  made  for 
assistance.  It,  therefore,  knows  not  when  to  bring 
pressure  for  payment;  the  Government  has  only  its 
surplus  loaned  and  has  no  need  to  bring  pressure  at 
all  until  current  public  expenditures  begin  to  run 
ahead  of  current  revenues. 

For  these  several  reasons,  an  interest  charge, 
enough  above  the  usual  commercial  rate,  should  be 
made,  to  compel  the  bank  to  do  business  on  its 
own  capital  and  to  retain  an  unencumbered  capital- 
surplus  convertible  by  hypothecation  with  the  Gov- 
ernment when  commercial-demands  might  make 
hypothecation  profitable.  This  would  make  the 
Government  surplus  an  emergency  fund  that  would 
be  sought  for  by  the  banks  only  in  time  of  financial 
pressure  —  a  fund  which  would  re- 

terest  charle^^  ^^^"  ^^  ^^^  Government  immediately 
after  the  emergency  had  passed.  This 
would,  to  the  extent  of  Government  surplus  available, 
avoid  the  necessity  of  importing  gold  when  there  is 
an  adequate  supply  in  the  country  to  meet  all  mone- 
tary needs,  and  at  the  same  time  would  give  to  the 
banks  the  advantage  of  being  able  to  obtain  money 


230  THE   BANK   AND    THE   TREASURY 

on  favorable  terms  when  they  have  good  capital- 
resources  to  hypothecate. 

The  Proposed  Amendment  lor  a  Guarantee  Fund  to 
Secure  Credit-Accounts 

It  has  been  stated,  and,  since  the  days  of  wild-cat 

banking,  the  statement  has  gone  without  challenge, 

that  a  commercial  bank  should  not  be  allowed  to 

commence,  not  to  say  continue,  business  until  it  had 

provided  itself  with  property  equipment  sufficient  to 

make  both  its  ''deposits"  (credit-ac- 
Capital  support  ^  \       j  v         i     •  a 

to  credit-accounts  ^ounts)  and  its  note-issues  secure.     A 

proper  regard  for  the  principle  of 
elasticity  requires  a  re-statement  after  the  manner 
suggested  by  Mr.  Cannon.  A  bank  should  have  a 
capital  equipment  large  enough  to  protect  its  credit, 
and  to  meet  all  commercial  demands  of  its  customers 
for  rrioney  without  calling  in  its  loans. 

If  we  accept  this  as  a  proper  statement  of  the 
principle  of  capitalization  and  equipment,  it  follows 
that  any  security  given  to  a  bank's  credit-accounts, 
or  to  its  note- issues,  should  be  provided  out  of  the 
Contrasted  with  resources  of  the  bank.  The  recent 
Government  suggestion  of  Secretary  Shaw,  in  the 
underwriting  ^^^j.^^^  ^bove  referred  to,  is  to  the 
effect  that  the  amount  received  from  the  tax  on  issues 
(premiums  for  insurance  of  issues)  should  be  utilized 
to  guarantee  the  Government  against  loss  from  un- 
derwriting the  emergency  notes  of  the  banks.     In 


MODIFICATIONS   TO  INCREASE  ELASTICITY      231 

this  the  Secretary  of  the  Treasury  has  not  abandoned 
the  idea  of  secured  issues,  but  he  would  have  the 
direct  security  come  from  the  Government.  Those 
who  have  declared  themselves  for  secured  issues 
would  have  bank-notes  secured  by  the  hypothecation 
of  the  capital-resources  of  the  bank,  while  others, 
still  more  conservative,  notable  among  them  Mr. 
Dawes,  would  have  the  principle  of  security  extended 
to  the  "deposits"  of  the  banks  as  well  as  to  the 
''issues." 

The  theory  on  which  "security"  or  "insurance" 
of  deposits  rests,  is  this:  that  the  credit-accounts 
(deposits)  of  the  bank  are  the  form  of  current  funds 
most  used  in  business;  that  the  business  of  the  com- 
munity depends  quite  as  much  on  the  "soundness" 
of  bank-credit  as  on  the  "soundness"  of  Government 
credit-money ;  that  the  profits  of  the  bank  are  derived 
from  buying  income-producing  commercial  paper  in 
exchange  for  bank-credit;  the  bank,  therefore,  should 
protect  those  who  have  taken  its  credit  in  exchange, 
so  long  as  it  remains  outstanding  for  current  use.  In 
other  words,  the  public  is  quite  as  much  interested  in 
"sound  bank-credit"  as  it  is  in  "sound  money,"  and 
since  the  bank  is  permitted  to  issue  "current  credit- 
accounts"  for  its  own  profit  it  should  be  required  to 
protect  these  with  its  own  capital-resources.  The 
theory  is  eminently  sound  in  principle,  and  in  practice 
would  add  much  to  the  integrity  of  commercial 
bank-credit. 


232  THE   BANK   AND   THE   TREASURY 

If  we  require  the  banks  to  deal  on  their  own 
capital,  the  note-issues  should  be  secured  by  bank 
assets.  Again,  if  we  are  to  have  a  true  system  of 
assets  banking,  then  in  so  far  as  the  security  for 
current  accounts  of  banks  is  not  provided  by  original 
capitalization  it  should  be  derived  from  their  capital- 
ized current-income.  An  enforced  contribution  from 
income,  in  the  form  of  interest  payments  on  Govern- 
ment loans  ("issues"  and  "deposits") 
A  trust  fund  to  se-  .  •   j        i,        ^i.  •  i       4. 

cure  ^^deposits^^    i"  P^^io^s  when  the  commercial  rate 

is  high,  would  not  only  operate  to 
make  elastic  that  part  of  our  money  system  repre- 
sented by  note-issues  and  credit-accounts,  but  might 
also  be  used  to  build  up  a  "fund"  which  would  be 
held  by  the  Government  for  the  benefit  of  the  bank's 
creditors.  The  security  of  "note-issues"  and  of 
"deposits,"  it  is  argued,  would  give  to  all  forms  of 
credit  used  as  current  funds  in  the  community  that 
element  of  security  the  lack  of  which  has  so  often 
precipitated  wholesale  panic  and  individual  disaster. 
Such  an  insurance  fund  for  "deposits,"  however, 
could  not  be  built  up  and  maintained  on  any  other 
principle  than  that  of  "banking  on  capital-resources." 
The  suggestion  for  an  adequate  guarantee  fund  for 
deposits  is  premised  on  an  interest  charge  on  secured 
issues,  and  on  an  interest  charge  on  secured  deposit- 
loans,  so  made  and  regulated  as  to  make  the  capital- 
resources  of  the  bank  more  readily  convertible.  The 
secured-note  may  enter  into  circulation  without  ques- 


MODIFICATIONS   TO   INCREASE  ELASTICITY      233 

tion  as  to  the  soundness  of  our  credit-money  system ; 
the  guaranteed  credit-account  might  be  used  in  busi- 
ness to  give  the  same  imphcit  faith  as  to  the  sound- 
ness of  our  commercial-bank-credit.  With  such  a 
The  benefits  of  modification  in  the  Law,  it  is  said,  if 
secured  credit-  the  Law  were  properly  administered, 
accounts  ^^^  banks  would  be  compelled  to  do 

a  safe  business.  The  banks  would  be  required  to  do 
business  at  an  increased  capital  cost,  it  is  true,  but 
this  would  not  necessarily  mean  an  increased  rate  of 
interest  to  customers,  nor  decreased  profits  for  the 
banks.  As  a  result  of  increased  capital  strength  and 
enlarged  redemption  equipment  their  credit  would 
be  more  readily  salable,  and  the  banks  might  do  a 
larger  business  than  under  a  system  which  compels 
them  to  refrain  from  credit  expansion  when  accom- 
modation is  most  in  demand.  This  would  bring 
about  that  much  desired  condition  so  zealously  ad- 
vocated by  Mr.  Eckels,  in  which  the  Government 
would  be  entirely  divorced  from  the  banking  busi- 
ness. All  commercial-credit  business  would  still  be 
done  by  the  banks;  the  banks  would  be  operating 
on  their  own  resources;  and  the  Government  when 
acting  at  all  would  serve  in  an  auxiliary  capacity 
only  —  that  of  trustee  for  all  parties  in  interest  and 
administrative  guardian  of  the  welfare  of  the  nation. 
Similar  suggestion  has  come  from  several  sources. 
The  Fowler  bill  of  1897  contained  a  provision  for  a 
guarantee  fund.     The  proposition  has  been  argued 


234  THE   BANK   AND    THE    TREASURY 

in  financial  journals.  The  opposition  developed  has 
come  largely  from  the  older  and  stronger  banks.  To 
them  there  is  an  advantage  in  the  unsecured  system 
Character  oj  op-  '^^  that  their  solvency  is  not  questioned ; 
position  to  secur-  and  by  virtue  of  their  reputed  ability 
tng  eposts  ^^  j^g^^  current  obligations  they  are 
able  to  make  large  sales  of  credit  compared  with 
capital  employed.  To  establish  a  common  fund  for 
the  security  of  all  credit-accounts  sold  by  all  the  banks 
in  the  system  would  give  to  the  small  bank  the  same 
reputation  for  soundness  as  is  enjoyed  by  the  largest 
institutions.  This  argument  would  be  valid  under 
our  present  system  of  banking,  wherein  there  is  no 
check  on  credit  sales  other  than  a  "money-reserve." 
If,  however,  an  amendment  were  made  which  re- 
quired a  minimum  cash-reserve  to  be  provided  out  of 
capital,  and  the  powers  of  the  Comptroller  were  ex- 
tended to  prevent  the  extension  of  credit  beyond  a 
certain  proportion  of  that  capital  available  in  the 
form  of  redemption  equipment,  neither  the  large  nor 
the  small  bank  could  extend  its  credit  beyond  the 
prescribed  limit.  Each  bank  would  be  restricted  in 
its  maximum  business  to  a  safe  proportion  to  capital 
invested.  Under  such  a  provision,  the  large  bank 
could  not  be  deprived  of  business  by  a  small  bank 
unless  the  small  bank  increased  its  capital,  in  which 
case  the  small  bank  would  be  entitled  to  do  a  larger 
business.  It  may  be  questioned  whether  any  pro- 
vision made  for  increased  safety  to  business  would 


MODIFICATIONS   TO  INCREASE  ELASTICITY      235 

reflect  on  the  worthy  institution.  On  the  other  hand, 
much  may  be  gained  by  all  parties  concerned  through 
the  enlarged  opportunities  offered  to  banks  for  doing 
business.  And  through  a  system  of  mutual  respon- 
sibility pressure  would  be  brought  by  the  banks 
themselves  for  an  enforcement  of  the  Law. 

Whatever  may  be  conceived  as  a  proper  applica- 
tion, in  concrete  provisions  of  the  Law,  the  principles 
governing  increased  availability  of  capital-assets  of 
National  banks  and  increased  elasticity  by  simple 
changes  in  the  existing  system  may  be  summarized 
as  follows: 

(i)  An  amendment  of  the  "money-reserve"  pro- 
visions of  the  Bank  Act,  requiring  a  minimum  "cash  "- 
reserve  to  be  provided  out  of  capital,  would  operate  to 
give  increased  financial  strength  to  the  banks;  it 
would  make  possible  increased  elasticity  of  credit- 
accounts  and  credit-accommodations. 

(2)  A  change  in  the  Bank  Act  fixing  a  minimum 
of  "redemption  equipment"  to  be  provided  out  of 
capital,  making  this  proportionate  to  the  maximum 
of  credit-obligations  outstanding,  would  operate  to 
increase  the  capitalization  of  banks. 

(3)  An  amendment  requiring  interest  payments  on 
"issues"  (loaned  by  the  Government  to  the  banks) 
would  operate  to  make  the  note-circulation  an 
elastic  currency. 

(4)  An  amendment  of  the  Bank  Act  permitting 
the  hypothecation  of  "gilt-edge"  securities  for  Gov- 


236      THE  BANK  AND  THE  TREASURY 

ernment  "deposits"  would  encourage  capital  invest- 
ment in  more  highly  convertible  assets. 

(5)  An  amendment  requiring  the  payment  of  in- 
terest on  "deposit"  loans  would  make  the  Treasury 
surplus  an  important  support  to  the  banks  for  the 
support  of  increased  credit-accommodation. 

(6)  The  proposed  amendment  to  constitute  the 
Government  income  from  interest  on  loans,  taxation, 
etc.,  a  contingent  sinking  fund  has  in  it  possibilities 
for  increasing  the  soundness  of  bank-credit  and  for 
increasing  elasticity  in  so  far  as  elasticity  depends  on 
public   confidence   in   the   banking  system. 

(7)  A  provision  requiring  that  all  capital  used 
for  the  purchase  of  "  banking  house,"  "real  estate," 
for  underwriting,  etc.,  be  considered  banking  capi- 
tal impairment,would  have  a  wholesome  effect  and 
would  serve  as  a  protection  to  the  public. 

(8)  A  clause  requiring  that  all  special  and  prefer- 
ential deposits  be  stated  in  all  published  reports, 
would  do  much  to  correct  present  evils  in  banking 
practice. 

Every  measure  taken  to  enable  banks  to  meet 
demands  for  accommodation  by  use  of  capital 
equipment  would  tend  to  minimize  fluctuation  in 
demand,  and  to  decrease  the  amount  of  capital 
which  must  be  held  in  reserve  in  low  income-pro- 
ducing investments  and  thus  be  to  the  advantage 
of  the  banks  as  well  as  of  the  business  community. 


Chapter  XVII 

THE   SUPERIORITY   OF   THE   AMERICAN   FUNDING 
SYSTEM  OVER  THOSE   OF   OTHER   COUNTRIES 

A  CENTURY  of  adaptation  to  new  and  ever-changing 
conditions  has  given  to  America  some  remarkable 
institutions.  In  none  is  the  strenuous  character  of 
the  people  more  strongly  marked  than  in  our  financial 
system.  In  none  have  we  developed  greater  possi- 
bilities for  solidity  and  working  efficiency  than  in  our 
concerns  organized  to  supply  the  increasing  demand 
for  current  funds.  Living  amid  great  natural  re- 
Optimism  and  sources,  hampered  for  lack  of  capital 
conservatism  as  and  industrial  equipment,  working  in 
jactorsinbusiness  drcumstances  which  require  intensity 
of  effort  and  strictest  economy,  the  balance  of 
National  prosperity  has  been  swung  by  two  contend- 
ing forces  —  the  one  conservative,  the  other  promo- 
tive. Our  conservatism  has  consisted  in  measures 
to  protect  property  already  acquired.  Our  promo- 
tions have  been  efforts  to  apply  all  our  own  resources, 
as  well  as  those  which  might  be  acquired  from  others 
through  contracts  of  current  credit  and  of  capitaliza- 
tion. An  inventive  people,  we  have  exercised  our 
best  talent  in  devising  ways  and  means  for  doing 

[237] 


238  THE   BANK   AND   THE   TREASURY 

business,  and  to  this  end  both  capital  and  current 
funds  have  been  obtained  in  exchange  for  contracts 
made  for  the  future  dehvery  of  money.  The  rc- 
suh  at  times  has  been  to  carry  investment  judgment 
beyond  all  reasonable  certainty  of  return. 

Nor  has  the  situation  been  an  unnatural  one. 
With  teeming  riches  on  every  hand,  awaiting  only  the 
intelligent  application  of  capital  for  their  recovery, 
when  markets  have  been  high  the  inducement  to 
promotion  and  credit  investment  has  been  great. 
When  failure  has  come,  it  has  more  often  been  due 
to  changes  in  general  market  conditions  than  to  dis- 
Failure  to  meet  appointment  in  productive  resuUs. 
contracts  j or  ju-  Prospective  money  returns  have  not 
ture  delivery  always  been  realized  within  the  term 
of  a  loan.  Failure  in  judgment  as  to  the  amount  of 
money  obtainable  in  the  future  has  resulted  in  inability 
to  make  money  delivery  —  in  inability  to  meet  credit- 
obligations.  Even  when  the  rewards  of  nature  have 
surpassed  all  calculation,  money  payments  required 
by  contracts  of  capitalization  and  current  credit  have 
not  been  met. 

As  before  suggested,  the  money  returns  required 
by  contracts  of  credit  have  depended  quite  as  much 
on  the  market  price  obtainable  of  the  thing  produced 
as  on  the  amount  of  the  physical  product.  The  mar- 
ket has  been  subject  to  world  conditions  and  to  fluc- 
tuations which  the  parties  to  the  contract  could  not 
foresee;  so  violently  have  these  fluctuations  in  world 


SUPERIORITY   OF   THE  AMERICAN   SYSTEM      239 

conditions  reacted  on  our  credit  relations  that  period- 
ically commerce  and  industry  have  become  paralyzed 
Failures  due  to  ^y  forced  liquidations  and  the  with- 
world  market  drawal  of  working  funds.  In  each 
conditions  p^^j^^  ^^  increased  world  activity  and 

increasing  financial  return,  capital  has  been  more 
easily  obtained  from  abroad;  with  each  period  of 
decreasing  world  demand  and  consequent  lower 
prices  for  products,  capital  has  become  more  conserv- 
ative, forcing  retrenchment  and  financial  readjust- 
ment. Out  of  such  a  situation  —  alternately  moved 
by  the  forces  of  conservatism  (or  protection  to  wealth 
acquired)  and  by  forces  of  promotion  and  credit  ex- 
pansion (or  endeavor  for  increasing  gains)  —  our 
funding  institutions  have  arisen. 

In  the  organization  and  control  of  institutions  of 
current  credit,  the  guiding  principle  of  the  American 
people  has  ever  been  and  to-day  is  to  give  to  capital 
the  highest  utility  compatible  with  safety.  Pro- 
ceeding from  this  principle,  alternating  in  control 
between  the  forces  of  conservatism  and  those  of 
credit  expansion,  we  have  developed  a  National 
system  that  is  unique  —  a  system  in  which  both  our 
money  and  our  commercial  funds  are  on  a  credit 
basis.  In  the  interest  of  National  economy  and 
business  safety,  our  money  (largely  credit-money)  is 
issued  by  an  agency  of  Federal  Government  —  the 
United  States  Treasury.  For  purposes  of  utility,  our 
comniercial-credit  is  issued  and  controlled  by  private 


240  THE   BANK   AND   THE   TREASURY 

locally- independent  institutions  —  our  commercial 
banks.  The  more  vividly  to  portray  our  National 
funding  system,  it  has  been  described  as  a  mammoth 
structure  of  delicate  balance  and  adjustment  resting 
on  two  independent  and  widely  separated  columns 
The  principles  oj  or  pillars :   the  one  is  a  column  of 

safety  and  econ-  $^  .^q  ^^  qo^  ^f  credit-money,  which 
omy  tn  our  finan-  ^  '->      '        '  -" 

cial  system  has  for  its  foundation  the  gold  Treas- 

ury-reserves ;  the  other  is  a  column  or  pillar  of  about 
$10,000,000,000  of  bank-credit,  which  has  for  its 
foundation  the  reserves  of  the  commercial  bank.  On 
these  two  columns  or  pillars  is  superimposed  from 
$30,000,000,000  to  $60,000,000,000  of  business-credit 
that  looks  to  the  resources  of  the  two  independent  and 
widely  separated  institutions  above  referred  to  —  the 
Treasury  and  the  bank  —  for  support.  The  great 
problem  of  the  century  past  has  been  to  make  this 
structure  a  safe  one  in  which  to  do  business.  The 
problem  of  to-day  is  to  so  lay  the  foundations  that  the 
columns  may  be  able  to  support  the  constantly 
shifting  strain  that  is  placed  upon  them. 

In  planning  for  the  present  as  well  as  for  the  future 
we  must  plan  for  the  business  of  a  continent.  Our 
The  abandonment  business  demands  are  larger  and  more 
oj  the  European  varied  than  those  of  any  other  coun- 
^^^^  ^^  try.     Our  plans,   therefore,  must  be 

continental.  We  cannot  confine  our  view  to  one 
State,  as  does  France,  or  Spain,  or  Austria.  We 
already  have  developed  a  banking  power  comparable 


SUPERIORITY   OF  THE  AMERICAN  SYSTEM      241 

with  that  of  all  Europe.  From  considerations  of 
local  autonomy  and  National  development  we  have 
long  since  abandoned  the  European  system,  the  cen- 
tral feature  of  which  is  a  State  bank  under  Govern- 
ment direction  and  control. 

That  the  Treasury,  under  such  a  system  as  we 
have,  cannot  supply  the  people  with  current  funds 
goes  without  saying.  Even  the  money-demands  of 
commerce  and  industry  cannot  be  supplied  except 
through  loans,  and  the  Government  has  permanently 
retired  from  the  loan  business.  Loaning  is  the  only 
method  by  which  the  fluctuating  demand  for  funds 
may  be  met  under  any  system  of  finance.  In  Ger- 
The relation 0} the  "^^ny,  in  Russia,  and  in  France  —  in 

Treasury  to  the  fact  wherever  the  general  government 
money  market        -^  ^j^^  ^  ^^^j.^^  _  ^^^^^  j^^^^  ^^^  ^^ 

made  to  the  people  direct.  But  under  a  system  such 
as  ours,  in  which  the  Government  has  no  institution 
of  commercial-credit,  the  only  manner  in  which  the 
Government  can  bring  its  large  financial  resources  to 
the  support  of  the  market  is  through  independently 
organized  commercial  banks. 

How    under    Our    System    the    Treasury    and    the 

Commercial  Bank  may  Work  together  to  Provide 

the  Elasticity  Required 

Since  both  money-demands  and  credit-demands 
fall  immediately  on  the  commercial  bank  it  is  to  this 
that  we  must  look  for  the  means  necessary  to  supply 


242       THE  BANK  AND  THE  TREASURY 

these  demands.  Our  inquiry  is,  therefore,  Under 
such  a  system  as  that  with  which  we  are  working, 
how  may  the  banks  the  better  supply  the  fluctuating 
money  and  credit-demands,  and  how  may  the  Treas- 
ury best  lend  support  to  the  banks  without  weakening 
Proposed  method  its  support  to  the  credit- money-issues 
oj  Treasury  of  the  Government  ?  Answer  to  this 
support  inquiry  has  come  from  some  of  our 

leading  bankers  in  the  following  form:  "That  the 
Treasury  be  required  to  deposit  all  its  current  funds 
over  and  above  its  currency  requirements  in  the 
banks."  The  reason  urged  in  support  of  this  propo- 
sition is  that  such  a  requirement  would  "prevent  the 
money  of  the  country  being  locked  up  in  the  public 
vaults,  thus  depriving  business  of  its  proper  use." 

In  opposition  it  is  said  that  the  reasoning  by  which 
the  above  conclusion  is  reached  proceeds  from  two 
fallacies :  first,  that  the  money  held  by 
Objections  raised  the  Treasury  is  abstracted  from  the 
money  stock  of  the  country,  and, 
therefore,  operates  to  cripple  business,  and,  second, 
that  greater  elasticity  would  be  given  to  bank-credit 
by  having  the  resources  of  the  Government  deposited 
in  commercial  banks. 

The  popular  notion  that  money  in  the  vaults  of  the 
Government  is  abstracted  from  the  money  stock  "of 
the  country"  has  already  been  discussed.  There 
can  be  no  reasonable  conclusion  other  than  that  the 
supply  of  money  for  business  purposes  finds  its  level 


SUPERIORITY  OF  THE  AMERICAN  SYSTEM      243 

through  the  market,  and  that  whatever  is  regularly 
held  in  reserve  by  any  particular  government  is  not 
abstracted  from  the  money-supply  of  a  particular 
Treasury  stock  country,  but  goes  rather  to  reduce  the 
from  national  available  money  stock  of  the  world, 
money  supply  which  may  be  made  available  for 
private  business  ends.  If,  therefore,  the  Treasury 
surplus  of  the  United  States  may  be  made  available 
for  private  business  uses  in  time  of  extraordinary 
business  demand,  such  Treasury-reserve  instead  of 
decreasing  the  money  stock  of  the  country  will  in- 
crease it  to  the  full  extent  of  the  amount  thus  made 
available.  Furthermore,  it  may  be  said  that  the 
money  in  the  vaults  of  the  Treasury  is  not  idle.  On 
the  contrary,  in  so  far  as  it  is  needed  to  support  the 
credit-issues  of  the  Government,  it  gives  to  the 
country  from  eight  to  ten  times  the  amount  of  money 
which  is  held  in  reserve  for  the  support  of  these 
credit-issues.  The  Treasury-reserves,  therefore, 
enable  the  Government  to  supply  to  the  people  from 
eight  to  ten  times  as  much  money  as  it  could  do  at 
the  same  cost  if  these  reserves  were  not  so  held. 

Again,  in  so  far  as  the  general  fund  of  the  Treasury 
is  not  necessary  to  the  support  6f  credit-issues  of 
Government  they  must  be  looked  to  as  current  cash 
for  the  carrying  on  of  a  public  institution.  To  say 
that  public  business  is  not  a  part  of  the  business  of 
the  country  would  certainly  be  erroneous.  The 
actual  need  of  the  Government  for  current  funds 


244      THE  BANK  AND  THE  TREASURY 

with  which  to  carry  on  its  business  has  been  variously 

estimated  at  from  $100,000,000  to  $200,000,000.  To 

Treasury-reserves  the  extent  that  the  amount  held  in  the 
may  increase  na-  rr-i  •  i.  i.  1  i.      1 

lion's  money        Treasury  is  not  to  supply  an  actual 

supply  funding  need  this  surplus  should  be 

reduced  —  but  not  by  loaning  it  to  private  parties. 
The  Government  has  obligations  of  its  own  to  meet, 
and  may  at  any  time  apply  a  surplus  to  their  reduc- 
tion. If  at  any  time  there  may  be  said  to  be  any 
idle  money  in  the  Treasury  this  is  not  a  fault  of  the 
system,  but  rather  a  fault  of  those  who  are  operating 
it.  But  the  mere  fact  of  the  segregation  of  public 
funds  from  private  funds  leaves  the  Government  at 
all  times  in  a  position  to  lend  temporary  aid  to  private 
funding  institutions,  which  it  could  not  do  if  the 
public  funds  had  been  commingled  with  those  of 
private  agencies. 

The  second  fallacy  is  quite  as  apparent.  To  make 
the  commercial  bank  the  regular  recipient  or  deposi- 
tory of  Government  funds  as  they  are  received,  when 
the  Government  itself  is  out  of  the  banking  business, 
cannnot  add  to  the  elasticity  of  bank-credit.     If  Gov- 

Government  de-  ernment-deposits  with  the  banks  were 
posits  in  banks  do  ,     i      1       ,      ,  •<•  .    ^1  • 

not  increase  elas-  ^^  ^^  ^^P^  ^^  ^  uniform  amount,  this 
ticity  amount  would  soon  become  absorbed 

in  business,  and  the  bank-reserves  would  be  reduced 
to  the  usual  safe  working  proportion.  Whenever  an 
extraordinary  demand  for  money  or  for  current  funds 
might  arise  the  bank  would  be  in  no  better  position 


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SUPERIORITY   OF   THE  AMERICAN   SYSTEM      245 

than  before  to  meet  this  demand.  This  is  an  assump- 
tion most  favorable  to  such  a  reciprocal  arrangement. 
The  revenues  and  expenditures  of  Government  are 
not  uniform.  Were  the  revenue  receipts  and  current 
expense  payments  to  be  made  through  the  banks  this 
would  be  added  cause  of  monetary  and  credit  dis- 
turbance, since  it  often  happens  that  the  banks  are 
hardest  pressed  and  are  required  to  keep  the  largest 
May  increase  reserves  for  their  own  protection  at  a 
monetary  disturb-  time  when  the  expenses  of  the  Gov- 
^"'^^'^  ernment  are  in  excess  of  revenues  and 

the  Treasury  surplus  is  running  low.  If,  for  exam- 
ple, the  banks  had  been  the  fiscal  agents  of  the  Gov- 
ernment within  the  year  1903-4,  it  would  have  been 
necessary  for  them  not  only  to  have  paid  for  the 
Panama  canal  purchase  and  to  have  arranged  for  the 
other  extraordinary  fiscal  payments,  but  they  would 
also  have  been  required  to  meet  a  revenue  deficit  of 
$41,700,000.  That  is,  all  of  these  causes  would 
have  operated  to  reduce  the  Government  surplus, 
and  the  Treasury  must  have  drawn  heavily  on  the 
banks  as  a  means  of  protecting  its  own  credit-obliga- 
tions. Had  these  drafts  been  postponed,  the  Gov- 
ernment, with  a  large  surplus,  would  have  been  forced 
to  borrow  money  to  fund  its  current  needs.  To 
place  the  Government  in  a  position  of  tliis  kind  would 
hamper  public  business  without  adding  anything  to 
the  strength  of  the  banks.  Such  an  alliance  between 
the  Government  and  the  banks  would  reduce  their 


246       THE  BANK  AND  THE  TREASURY 

ability  to  extend  commercial  accommodation  and 
would  stand  in  the  way  of,  rather  than  permit,  in- 
creased elasticity  in  the  system. 

The  Independent  Treasury  Increases  the  National 
Money  Supply 

So  long  as  the  Government  remains  out  of  the 
banking  business  (and  with  us  this  seems  to  be  an 
established  policy),  the  greatest  elasticity  obtainable 
must  come  through  the  collateral  support  which  an 
Independent  Treasury  is  able  to  give  to  independent 
commercial  banks.  The  fact  that  the  National 
Treasury  carries  in  its  vaults  from  $100,000,000  to 
$250,000,000  in  money  over  and  above  its  currency 
requirements,  and  that  this  may  be  kept  free  for 
collateral  support  to  the  banks,  suggests  the  basis  on 
which  the  Government  may  aid  the  banks  to  meet 
increased  money-demands  and  at  the  same  time 
permit  the  banks  to  increase  their  credit-accounts  to 
customers.  It  usually  happens  that  the  Treasury 
surplus  becomes  largest  in  periods  of  low  money- 
demand  —  at  times  when  the  banks  are  giving  an 
inordinate  expansion  to  their  credit.  For  example, 
from  June  30,  1899,  to  June  30,  1902,  the  ordinary 
Causes  money  to  receipts  of  the  Treasury  exceeded  the 
^:r;;";';r  ^-^dinary  disbursements  by  $345,000,- 
demand  ooo.     During   the   same   period    the 

bank-credit  of  the  country  expanded  about  $2,000,- 
000,000.     From  June  30,  1902,  to  June  30,  1904,  the 


SUPERIORITY  OF   THE  AMERICAN   SYSTEM      247 

ordinary  receipts  of  the  Treasury  exceeded  the  ordi- 
nary expenditures  only  $12,000,000,  and  during  the 
latter  fiscal  year  there  was  an  actual  deficit  of  $41,- 
700,000.  This  falling  off  of  Government  revenues 
was  coincident  with  great  financial  pressure  on  the 
banks,  and  a  consequent  reduction  in  credit-accom- 
modations to  the  public. 

The  net  results  of  the  Independent  Treasury  sys- 
tem during  the  years  referred  to  have  been  to  bring 
into  the  United  States  in  time  of  greatest  prosperity, 
and  to  keep  here  during  a  period  of  credit  expansion, 
at  least  $200,000,000  in  gold,  which  if  placed  in  the 
vaults  of  banks  would  doubtless  have  caused  still 
greater  credit  expansion  on  the  one  hand,  and  at  the 
Treasury-reserves  same  time  would  have  set  up  an  ex- 
released  in  high    portation  of  gold.     Even  if  no  finan- 

money -demand  •i-juji,  •  i.i-UT_      i 

^  cial  aid  had  been  given  to  the  banks 

by  the  Treasury,  the  result  of  the  independent  fiscal 
system  would  have  been  beneficial.  During  the 
period  of  low  money-demand  the  Treasury  was 
gradually  absorbing  an  increasing  surplus,  thus  pre- 
venting exportation  of  gold,  while  during  the  period 
of  extraordinary  money-demand  the  Government 
was  gradually  disbursing  the  surplus  to  meet  its  own 
revenue  deficit.  The  same  effect  may  be  traced 
through  the  recurring  periods  of  credit  expansion  and 
credit  retraction  since  the  Independent  Treasury  was 
established. 


248  THE   BANK    AND    THE   TREASURY 

Collateral  Aid  of  the   Treasury  to  Prevent  Credit 
Contraction 

But  the  history  of  the  last  three  years  (1902,  1903, 
and  1904)  teaches  another  lesson,  which  by  the  banks 
should  never  be  forgotten.  When  the  effects  of 
speculative  loans  had  brought  about  credit  reaction, 
and  business  conservatives  began  to  demand  settle- 
ment on  contracts  for  money  delivery,  and  when  in- 
creased pressure  was  brought  on  the  banks  for  money 
payment,  the  rapidly  disappearing  reserves  would 
doubtless  have  proved  ruinous,  not  only  to  the  banks 
but  also  to  the  commercial  and  industrial  interests  of 
the  whole  nation  through  the  collapse  of  the  bank- 
credit  column  supporting  them,  had  not  the  National 
Treasury  responded  to  pleas  for  aid  from  commercial- 
credit  institutions.  A  volume  of  credit  had  been 
May  support  piled  up  which  was  too  great  for  the 
the  banks  in  time  banks  to  support  on  their  own  re- 
ojsrcss  sources.    The  crumbling  foundation 

of  bankers'  reserves  would  doubtless  have  gone  from 
under  and  given  way  to  the  financial  stress  which 
business  interests  were  bringing  to  bear  on  them  had 
not  the  Government  transferred  over  $100,000,000  to 
their  support.  Had  the  prescription  above  referred 
to  as  a  remedy  for  inelasticity  and  for  financial  weak- 
ness been  followed,  had  the  Government  previously 
deposited  its  surplus  in  the  banks  during  these  years 
of  so-called  prosperity,  instead  of  giving  to  the  great 


SUPERIORITY   OF  THE  AMERICAN   SYSTEM      249 

National  credit  structure  the  solidity  and  the  power 
of  endurance  which  is  bespoken  for  it,  it  would  have 
had  the  effect  of  adding  nothing  to  the  capital 
strength  of  our  commercial-credit  institutions;  it 
would  have  made  the  superstructure  still  more  top- 
heavy  —  would  have  placed  our  funding  system  in 
the  same  position  as  were  those  of  Germany,  Russia, 
England,  and  France.  That  our  business  suffered 
less  than  the  commerce  and  industry  of  Europe 
during  the  same  period  was  largely  due  to  the  very 
subsidiary  reserves  of  which  certain  individuals  are 
heard  to  complain. 

The  Independent  Treasury  gives  to  the  American 
system  a  strength  that  is  not  attainable  under  any  of 
the  much  lauded  foreign  financial  devices.  The  fact 
is  that  we  have  not  used  the  Independent  Treasury 
to  its  highest  advantage.  The  deposits  made  by  the 
Government  with  banks  are  loans  without  interest. 
So  long  as  the  Government  does  not  call  these  loans 
there  is  no  inducement  for  the  banks  to  pay  them. 
On  three  different  occasions  from  1899  to  1903  the 
Treasury  has  helped  the  banks  to  support  their 
financial  burdens.  In  each  case  the  strain  upon 
them  was  due  to  an  over-issue  of  their  own  credit 

and  to  inability  to  make  the  money 
Some  recent  ex-  ,       ,  1    1        -^i       . 

■periences  payments  demanded   without  a  vio- 

lent contraction  in  credit-accommo- 
dation. The  Government  has  stepped  in  to  prevent 
this  contraction.    But  when  the  stress  was  past,  what 


250      THE  BANK  AND  THE  TREASURY 

then  ?  Did  the  Government  again  gradually  repos- 
sess itself  of  the  moneys  gratuitously  loaned?  Has 
it  again  reclaimed  the  means  by  which  assistance  was 
rendered?  No;  following  just  such  reasoning  as  has 
been  quoted,  the  loans  remained  with  the  banks  still 
without  interest.  The  Treasury  was  able  again  and 
again  to  come  to  the  relief  of  the  banks  by  reason  only 
of  its  constantly  increasing  surplus. 

The  weakness  in  the  situation  lies  in  the  failure 
of  the  banks  to  reduce  their  temporary  loans  from 
the  Government  when  the  emergency  is  past,  and  in 
the  Treasury's  failing  to  call  in  its  demand  loans 
when  the  reserves  of  the  banks  become  adequate  to 
support  their  credit.  In  July  and  August  the  bank 
reserves  piled  up  till  they  were  becoming  a  source  of 
possible  weakness.  When  the  Panama  canal  pur- 
chase was  to  be  settled  for,  when  the 

WcQ  k  itCSS  t-ft 

present  practices  Government  revenues  began  to  fall 
off,  instead  of  demanding  a  return  of 
loans  to  the  banks  and  thus  reducing  the  large  sur- 
plus-reserves which  the  banks  had  accumulated,  the 
Government  preferred  to  still  further  reduce  the 
reserves  in  its  vaults,  calling  on  the  banks  for  only 
such  an  amount  as  seemed  necessary.  During  the 
month  of  September  there  was  a  gradual  withdrawal 
of  bank  reserves  to  supply  the  business  need.  Under 
circumstances  of  weakening  bank  reserves  and  of 
gradually  decreasing  revenue  of  Government,  with 
the  consequent  disappearing  of  the  Treasury  surplus, 


SUPERIORITY  OF  THE  AMERICAN  SYSTEM      251 

the  banks  may  not  only  be  deprived  of  collateral  aid 
in  time  of  financial  stress,  but  may  be  required  even 
to  still  further  weaken  their  money-reserves  by 
making  payments  to  the  Government.  Under  such 
circumstances,  the  banks  would  be  left  to  their  own 
resources,  with  the  Government  money-demand  as 
well  as  the  public  money-demand  to  supply.  The 
result  would  be  that  in  their  own  protection  the  banks 
would  be  forced  to  contract  business  accommodation 
in  such  a  way  as  to  make  the  present  practice  posi- 
tively dangerous. 

How  the  Treasury  Surplus  may  he  kept  as  a  Reserve 
for  Collateral  Support  to  Credit 

At  no  time  in  the  history  of  banking  were  the  time 
and  circumstances  more  opportune  for  Treasury  sup- 
port to  banks  than  in  1902  and  1903.  At  no  time  in 
our  history  might  the  Secretary  more  wisely  have 
withdrawn  the  Government  deposits  than  in  July 
and  August,  1904,  when  the  money-reserves  were 
piled  up  in  the  vaults  of  the  banks.  The  effect  of 
failure  to  do  this  was  twofold:  (i)  The  cheapness  of 
Interest  charges  money  caused  an  exportation  of  gold ; 
to  insure  prompt  (2)  the  low  rate  of  call-loans  encour- 
paymen  0)  oans  ^^^^  si)cculation.  In  September  we 
had  the  result  made  apparent  of  a  concurrent  flow  of 
money  to  the  interior  and  abroad,  and  at  the  same 
time  an  increase  in  speculative  activity  which  went 
on  unabated  till  about  December  first.     Thus  again 


252       THE  BANK  AND  THE  TREASURY 

we  had  a  brief  period  of  increasing  credit  expansion 
and  decreasing  bank-reserves.  These  movements 
did  not  prove  threatening,  it  is  true,  but  there  seems 
at  least  a  possibiHty  that  the  banks  may  again  call  to 
the  Treasury  for  collateral  aid,  and  under  conditions 
which  would  require  the  Treasury  to  turn  a  deaf  ear. 
Following  a  practice  by  which  the  Government  loans 
its  surplus  to  the  banks  without  interest  or  below  the 
ordinary  market  rate,  the  continuous  aid  of  the  Treas- 
ury to  the  banks  may  depend  on  the  exercise  of  dis- 
cretion by  the  Secretary.  If,  however,  the  Govern- 
ment were  to  charge  the  bank,  not  an  exorbitant  rate, 
as  would  a  money-lender  in  time  of  stress,  but  the 
usual  commercial  rate,  the  bank  would  promptly 
return  the  loan  when  money  falls  below  the  usual 
price.  In  either  case,  whether  by  exercise  of  official 
discretion  or  by  charging  a  rate  which  would  make 
the  restoration  of  reserves  autonomous,  the  Treasury 
support  to  the  system  would  not  be  weakened. 

Elastic  Possibilities  in  the  Bank-Note 

It  has  been  pointed  out  that  even  if  the  Treasury 
never  had  a  surplus  to  loan  to  the  banks  in  periods 
of  emergency,  under  the  American  system  we  have 
possibilities  for  increasing  circulation  for  current 
needs  that  are  not  inherent  in  foreign  systems.  This 
is  in  the  so-called  issues  of  banks.  If  the  bank  has 
unencumbered  resources  (mind  you,  z^wencumbered 
resources)  necessary  to  obtain  a  Government  "de- 


SUPERIORITY   OF   THE   AMERICAN   SYSTEM      253 

posit  "  (loan),  these  same  resources  may  be  pledged 
for  issue  —  a  loan  from  the  Government  in  the 
Equal  to  fluctu-  ^o™  of  "bank-notes."  July  i,  1904, 
aiing  money-  the  Treasury  reported  that  there  were 
eman  s  $449,000,000   of    bank-notes   in    the 

hands  of  the  banks  or  in  circulation.  These  issues 
alone  were  more  than  ample  to  meet  all  fluctuations 
in  money-demands  of  the  country.  The  only  trouble 
is  (as  in  the  case  of  a  permanent  policy  of  depositing 
Government  surplus  with  the  banks)  that  when  the 
banks  are  in  trouble  these  notes  are  not  available. 
Like  the  Government  deposits,  they  have  already 
been  absorbed  in  current  circulation,  have  all  been 
used  to  support  the  ordinary  banking  operations 
during  periods  of  low  money-demand,  and  in  time  of 
strain  the  banks  have  their  best  securities  tied  up  for 
funds  with  which  to  do  business  when  there  is  no 
strain  to  be  met.  In  time  of  extraordinary  demand 
they  are  left  helpless. 

Why  should  this  be  so?  Why  might  not  these 
notes  be  used  in  such  a  way  as  to  permit  an  increase 
of  at  least  $400,000,000  in  money  circulation  and  a 
simultaneous  increase  of  at  least  $1,600,000,000  of 
May  be  made  to  bank-credit-accounts  at  any  time  that 
respond  to  de-  an  extraordinary  demand  for  funds 
^^^  ^  might  be  made.     Many  bankers  have 

suggested  as  a  way  out  of  the  difficulty  that  a  tax 
be  placed  on  issues.  Secretary  Shaw  in  his  Chi- 
cago address  of  a  year  ago  pointed  to  this.      Re- 


254  THE  BANK  AND  THE  TREASURY 

quire  the  banks  to  pay  a  tax  equal  to  the  commercial 
rate  of  interest  (let  us  say  five  or  six  per  cent)  on  all 
issues  over  and  above  a  determined  minimum  —  or 
call  it  interest  on  the  "issue  loan"  of  the  Government 
to  the  banks  —  and  the  banks  would  not  encumber 
their  assets  except  when  money-demands  were  above 
that  rate.  These  suggestions  are  made  with  much 
force.  The  result  may  also  be  predicated  on  ex- 
perience. As  the  trustee  of  collaterals  and  as  the 
department  of  issue  and  control  of  the  bank-note, 
the  Treasury  might  thus  lend  as  much  support  for 
the  expansion  of  money  circulation  and  current  credit 
accommodation  as  the  system  itself  would  require. 

Aside  from  making  the  bank-note  circulation  in 
large  part  an  emergency  currency,  aside  from  giving 
elasticity  to  our  National  money  and  credit  system, 
the  effect  of  such  a  Law  would  be  twofold.  By 
taking  a  large  part  of  the  present  issue  of  bank-notes 
out  of  circulation,  except  when  an  extraordinary  de- 
mand arose,  the  ordinary  demand  must  be  supplied 
The  effects  0}  a  law  hy  Other  forms  of  money  —  the 
^on'^^lebolits'''^^  amount  taken  out  of  ordinary  circu- 
and" issues'''  lation  must  come  from  some  other 
source.  This  would  necessitate  an  increase  in  gold 
certificates  or  other  forms  of  money-issue.  The 
ordinary  money  requirement  would  be  met,  but  it 
would  not  be  met  by  bank-notes.  The  necessary 
money-funds  would  come  either  from  an  increase  in 
issues  of  Government  or  from  importation  of  gold. 


SUPERIORITY   OF   THE   AMERICAN   SYSTEM       255 

The  second  result  that  would  obtain  has  a  bearing 
on  the  financial  strength  of  the  banks  themselves. 
If  the  banks  were  not  encouraged  to  encumber  their 
best  resources  in  time  of  low  money-demand;  if,  it 
may  be  said,  they  were  required  to  retain  their 
capital  in  such  form  as  to  make  it  available  for  sup- 
port of  their  credit  and  were  permitted  to  deposit 
"gilt-edge"  securities  of  such  kind  and  quality  as 
might  be  prescribed  by  the  Treasurer  for  bank-notes 
in  time  of  strain,  the  support  which  is  now  given  to 
the  credit  of  Government  in  the  form  of  increased 
strength  to  the  bond  market  would  then  be  given  to 
the  banking  business.  In  other  words,  the  net  result 
would  be  an  increase  of  banking-capital  for  banking 
purposes  and  an  increase  in  standard  money  in  the 
country  —  a  result  which  in  itself  would  be  desirable 
as  a  means  of  supporting  greater  elasticity  in  credit- 
accommodation. 

Support  which  the  Treasury  may  give  to  the  Money 

Market 

Another  conservative  principle  is  contained  in  the 
American  system  that  is  not  afforded  by  that  of  any 
other  country:  As  the  one  institution  permitted  to 
issue  credit-money  the  Treasury  gives  to  the  people 
a  form  of  currency  more  convenient  in  use  than  gold, 
and  less  expensive  to  itself.  The  silver  dollar,  the 
greenback,  the  silver  certificate,  etc.,  cost  the  people 
who  use  them  just  as  much  as  gold  coin  or  gold 


256  THE  BANK  AND  THE   TREASURY 

certificates,  but  the  cost  to  the  Government  of  these 
credit- moneys  is  less.  By  means  of  their  issue  the 
Financial  advan-  Government  is  able  to  carry  on  its 
tage  oj  credit-  own  business  and  to  decrease  its  inter- 
money-issues  gst-bearing  debt  about  $600,000,000. 
What  the  Treasury  stands  pledged  to  do  and  what  it 
is  necessary  for  it  to  do  under  our  system  is  to  pro- 
tect these  credit-issues,  i.e.,  to  make  payment  in  gold 
when  gold  is  demanded.  So  long  as  no  doubt  arises 
as  to  this  there  can  be  no  financial  disturbance  on 
that  account.  But  there  may  be  a  distinct  advantage 
to  the  money  and  credit  system.  If  at  any  time  our 
foreign  balances  demanding  settlement  become  so 
great  as  to  cause  a  drain  on  bankers'  gold  reserves 
(the  foundation  for  some  $10,000,000,000  of  bank- 
credit),  it  may  become  necessary  to  stay  the  tide  of 
exportation  as  a  means  of  protecting  the  National 
credit  structure.  This  result  will  be  effected  through 
the  demands  made  by  the  banks  on  the  United  States 
Treasury  for  payment  of  Government  credit-issues. 
That  is,  through  their  own  reserves  the  banks  may 
reach  the  gold  reserves  of  the  Treasury  and  bring  them 
to  their  own  support.  Under  such  circumstances  and 
at  such  time  the  Government  will  be  brought  into 
the  gold  market  as  a  means  of  meeting  its  own  de- 
mand debt,  and  gold  may  be  had  for  the  support  of 
the  credit  of  American  Funding  Institutions  at  a  rate 
more  favorable  than  it  could  be  had  by  any  indi- 
vidual, private  banking  corporation,  or  foreign  nation. 


SUPERIORITY   OF  THE   AMERICAN   SYSTEM      257 

No  greater  fallacy  was  ever  put  forth  than  that 
which  concludes  that  a  Government  which  is  not  in 
the  banking  or  loan  business  can  supply  mone}- 
capital  direct  for  private  business.  If  all  the  gold 
coin  of  the  world  were  stamped  and  issued  from  the 
United  States  mint,  so  long  as  the  business  habits  of 
our  people  remained  the  same,  no  greater  amount 
of  gold  would  find  its  way  into  American  channels  of 
trade.  On  the  other  hand,  if  the  Government  did 
not  issue  or  coin  a  dollar  the  people  would  have  the 
same  amount  of  money  which  they  now  have  with 
which  to  do  business.  Our  circulation  would  not 
increase  or  decrease  in  either  case.  Instead  of  buying 
gold  and  taking  it  to  the  mint  we  might  buy  foreign 
coins ;  instead  of  retaining  the  currency  issued  by  the 
Government  or  that  put  out  in  payment  of  its  own 
obligations  we  might  have  some  other  form  of  cur- 
rency. But  the  usual  amount  of  currency  would  be 
supplied  from  one  source  or  another  by  coinage,  by 
issue  or  by  importation,  in  exchange  for  products  of 
our  mines,  our  manufactures,  etc.  What  the  Gov- 
ernment can  do  and  does  do  is  to  make  the  moneys 
ordinarily  needed  and  currently  used  conform  to  a 
National  standard,  and  to  protect  these  in  their 
Superiority  of  financial  and  physical  integrity  against 
I'ltr/rr  i-Pairment.  More  than  this,  the 
unties  Government  may  provide  a  means  by 

which  extraordinary  demands  for  money  may  be  met 
without  resort  to  importation.     It  may  make  pro- 


258       THE  BANK  AND  THE  TREASURY 

vision  for  meeting  this  fluctuating  demand  through 
the  banks,  and  it  may  make  this  extraordinary 
money-supply  more  readily  obtainable  than  might 
be  if  our  traders  and  manufacturers  were  required  to 
go  abroad  for  it.  This  may  be  done  either  by  direct 
money  loans  to  the  banks  from  the  Treasury  reserves, 
or  by  temporary  credit-issues  to  the  banks.  Instead 
of  the  banks  pledging  securities  abroad,  the  way 
should  be  opened  to  pledge  them  with  the  Treasury 
and  thereby  obtain  any  amount  of  money  for  such 
extraordinary  circulation  that  is  needed  without  dis- 
turbing domestic  and  foreign  trade.  And  for  this 
purpose  no  system  is  so  well  adapted  as  the  American 
system,  having  for  its  main  support  the  two  independ- 
ent financial  institutions  —  the  independent  com- 
mercial bank  and  the  Independent  Treasury,  the  one 
representing  the  financial  resources  of  fifteen  thou- 
sand independent  banking  institutions,  the  other 
representing  the  combined  resources  of  the  nation. 


CHAPTER    XVIII 

RECENT    EFFORTS    MADE    TO    FURTHER    ADAPT    OtJR 

FUNDING   SYSTEM  TO  THE   NATION'S 

BUSINESS  NEEDS 

Among  the  results  already  accomplished  in  the 
effort  to  adapt  our  funding  system  to  the  nation's 
business  needs,  prominently  stand  out  the  following : 
(i)  The  abandonment  of  the  European  funding  system. 
This  was  effected  through  the  refusal  of  the  Federal 
Congress  to  incorporate  the  third  bank  of  the  United 
States,  and  by  the  contemporaneous  withdrawal  of 
the  several  States  from  commercial  banking  enter- 
prises. (2)  The  establishment  of  independently  capi- 
talized commercial  banks  in  each  locality  whose  private 
funding  needs  and  resources  were  sufficient  to  induce 
capital  to  interest  itself  in  this  form  of  undertaking. 
(3)  The  establishment  of  an  Independent  Federal 
Treasury  —  a  department  of  Government  which  pro- 
vides the  means  necessary  for  meeting  public  fiscal 
obligations  without  drawing  on  private  capital  and 
Adaptations  al-  without  disturbance  to  local  business. 
Tmlrkanlol-  (4)  ^'^^^  Legal  Tender  Acts,  and  the 
ditions  several  Currency  Acts,  and  National 

Bank  Act  —  which  not  only  completely  segregated 
the  functions  of   money  coinage   and  money-issue 

[259] 


260       THE  BANK  AND  THE  TREASURY 

from  those  of  banking,  but  also  collected  into  a 
national  system  the  best  experience  of  a  quarter  of  a 
century  of  independent  banking.  (5)  The  gold 
standard  currency  Act  oj  1900  —  which  made  certain 
all  question  as  to  the  standard  of  money  valuation 
and  of  credit-money  payment  —  which  enjoined  the 
Treasurer  to  maintain  all  the  money-issues  of  the 
Government  at  a  valuation  equal  to  the  prescribed 
standard  —  and  which  adequately  capitalized  the 
ability  of  the  Division  of  Issue  and  Redemption  of 
the  Treasury  to  redeem  all  credit-money  obligations 
(i)  through  placing  in  the  hands  of  the  Treasurer  an 
adequate  gold  fund  to  be  protected  as  a  "reserve," 
(2)  by  giving  to  this  fund  a  first  lien  on  the  "general 
fund"  of  the  revenue  department  of  the  Treasury, 
and  (3)  by  arming  the  Secretary  with  the  full  loan 
power  of  the  national  Government,  as  a  means  of 
ultimate  redemption  of  credit-money-issues. 

These  results  are  accomplished  facts.  The  credit- 
money-issues  of  the  Treasury  are  "sound."  They 
pass  without  question  in  any  part  of  the  world  at  par 
with  gold  coin  of  the  United  States.  American 
National  banks,  as  independent  institutions  likewise, 
are  as  "sound"  as  those  of  any  other  country. 
The  need  which  Neither  has  our  banking  system  as  a 
has  not  been  sue-  whole,  and  our  business,  suffered  more 
cessfullymet  ^^^^  ''inelasticity"  of  current-funds 
than  have  the  older  nations  of  Europe.  Still,  our 
funding  system  is  admittedly  far  from  being  satisfac- 


EFFORTS   TO  MAKE   FURTHER  ADAPTATIONS    261 

tory;  there  yet  remains  a  condition  present  which  we 
cannot  fail  to  recognize  as  a  subject  of  serious  con- 
cern —  viz.,  that  our  own  funding  system  (as  well  as 
theirs)  has  not  satisfactorily  met  the  shifting  and 
fluctuating  demands  of  trade,  and  that  business  has 
suffered  much  on  this  account.  This  is  the  subject 
of  present  solicitation  and  of  many  prospective  meas- 
ures of  reform,  a  critical  review  of  which  is  presented. 
Before  undertaking  a  critical  review,  however, 
some  definite  standard  of  analytical  and  critical 
judgment  must  be  found.  This  standard  is  taken 
from  two  fundamental  conclusions  which  would  seem 
to  be  well  established  in  American  thought:  (i)  That 
an  institution,  public  or  private,  which  is  authorized 
Standards  ojjudg-  to  issue  credit-money  should  be  capi- 
ment  of  measures  talized  sufficiently  to  enable  it  to 
propose  maintain     adequate     reserves     with 

which  to  redeem  these  credit- issues  in  the  standard 
money  of  the  realm,  at  par,  on  demand.  (2)  That 
a  commercial  bank  which  is  not  supported  by  the 
Government  should  be  required  to  do  business  on 
its  own  capital.  That  is  to  say,  that  an  institution 
which  is  authorized  by  charter  to  circulate  its  own 
credit-accounts  in  the  community  for  current  funds 
should  have  a  capital  sufficient  to  make  it  a  safe 
institution  with  which  to  do  business;  and  that  the 
capital  should  be  guarded  as  a  special  fund  to  main- 
tain ''reserves"  with  which  to  meet  current  demands 
for   payment    on    these    credit-obligations   without 


2G2  THE  BANK  AND  THE  TREASURY 

forcing  commercial  credit  contraction  by  liquidation 
and  without  endangering  public  welfare. 

Accepting  these  general  conclusions  as  principles 
fundamental  to  "sound  currency"  and  "sound  bank- 
ing," several  other  conclusions  would  seem  war- 
ranted : 

I.  That  so  long  as  we  retain  the  gold  standard  of 
valuation  and  of  credit  redemption,  all  issues  of  the 
Treasury  (including  silver  coins  and  silver  certifi- 
cates, as  well  as  currency  obligations)  should  be 
interchangeable  and  should  be  recognized  as  prom- 
ises of  the  Government  to  pay  gold  on  demand.  It 
being  made  the  duty  of  the  Treasurer  to  maintain  all 
issues  at  par,  the  "gold  reserve"  in  the  Division  of 
Issue  and  Redemption,  the  lien  on  the  "general 
fund"  of  the  Treasury  given  to  this  division,  and  the 
loan  power  in  the  hands  of  the  Treasurer  for  reim- 
bursement of  the  gold  reserve  thus  created,  should 
be  placed  behind  the  silver  coins  and  silver  certifi- 
cates of  the  United  States  as  well  as  behind  the  green- 
backs and  the  Treasury  notes  of  1890.  The  duty  of 
the  Treasurer  with  respect  to  the  prompt  redemption 
of  these  issues  should  not  be  left  subject  to  doubt 
through  failure  to  make  specific  mention  of  them  for 
a  guide  to  official  conduct. 

II.  In  passing  judgment  on  measures  proposed  to 
increase  the  "soundness"  of  commercial  credit-funds 
issued  by  banks  (bank  accounts)  the  following  prin- 
ciples of  capitalization   should  be  recognized:   (i) 


EFFORTS  TO  MAKE  FURTHER  ADAPTATIONS    263 

That  no  resources  of  a  commercial  bank  should  be 
regarded  as  "unimpaired  capital"  which  are  not 
proper  capital  investments  and  which  may  not  be 
available  as  a  fund  to  supply  the  bank  with  ''cash" 
to   redeem    its   outstanding   credit.     (2)    That   the 

amount  of  capital  which  is  to  be  con- 
^coZts^ons'''^     sidered  as  available  (or  unimpaired) 

for  the  support  of  credit-accounts 
should  be  specifically  "reserved"  for  that  purpose 
and  protected  as  a  "reserve  fund,"  and  should  not  be 
allowed  to  become  encumbered  or  to  be  so  used  as 
not  to  be  at  all  times  accessible  for  the  redemption 
of  demand  credit-obligations.  (3)  That  all  funds 
which  are  to  be  considered  as  "reserves"  for  redemp- 
tion of  current  credit-obligations  should  be  capital 
funds,  and  the  accounts  kept  and  reports  published 
of  "reserve  funds"  should  not  include  money  or 
other  assets  borrowed  from  customers  —  i.e.,  ob- 
tained in  exchange  for  credit  liabilities.  (4)  That 
banks  should  never  be  permitted  to  extend  credit 
(sell  an  amount  of  credit-accounts  to  customers) 
which  is  not  adequately  protected  by  such  capital 
reservations ;  i.e.,  a  limit  of  safety  should  be  placed 
on  the  amount  of  credit-obligations  which  a  bank 
may  issue  proportionate  to  "unimpaired  capital." 
(5)  That  when  any  portion  of  the  capital  of  a  bank 
shall  be  lost,  or  encumbered,  or  in  any  manner 
rendered  unavailable  (as  in  the  purchase  of  real- 
estate  or  in  underwriting),  that  the  limit  of  credit 


264       THE  BANK  AND  THE  TREASURY 

issue  permissible  to  such  bank  should  be  reduced  in 
proportion  to  the  amount  so  rendered  unavailable 
for  current  redemption  purposes.  (6)  That  if  branch- 
banking  be  authorized,  the  amount  or  proportion  of 
unencumbered  capital  ''reserves"  should  be  the  same 
as  those  required  of  individual  banks. 

III.  Government  issued  currency,  and  privately 
issued  commercial-credit  funds,  having  been  ren- 
dered "sound"  by  the  Treasury  and  the  bank  each 
adequately  capitalizing  its  redemption  needs,  "elas- 
ticity" in  such  a  funding  system  as  ours  would  re- 
quire: (i)  That,  since  the  Treasury  cannot  supply 
directly  to  the  people  the  funds  required  in  business 
to  meet  the  fluctuations  in  money-demand  as  well  as 
in  commercial  credit-demands,  these  funds  must  be 
supplied  by  commercial  banks.  (2)  That,  since  the 
banks  are  organized  and  capitalized  to  supply  current 
Conclusions  with  credit-accounts  to  the  public  at  a 
respect  to  elas-  profit,  and  the  chief  fluctuations  in 
'^^-^  money-demands    are     bankers'     de- 

mands to  keep  up  the  money-reserves  drawn  against 
by  those  holding  current  accounts,  the  unimpaired 
capital  of  banks  should  be  sufficient  to  procure  this 
extraordinary  money-supply  when  needed.  (3)  That 
the  surplus  capital  reserves  of  banks,  kept  for  the 
purpose  of  expanding  the  money-supply,  either  as  a 
means  of  supporting  credit-accounts  or  of  expanding 
credit-accommodations,  should  be  invested  in  such 
securities  or  other  assets  as  are  readily  convertible 


EFFORTS   TO  MAKE  FURTHER  ADAPTATIONS    265 

and  such  as  will  be  received  by  the  Treasury  as 
collateral  for  money  loans  to  the  banks.  (4)  That 
these  Treasury  loans,  whether  in  the  form  of  gold 
("deposits")  or  credit-money  ("issues")  should  bear 
a  rate  of  interest  which  will  cause  the  banks  to  retire 
from  circulation  the  extraordinary  money-supply 
when  not  needed  —  i.e.,  when  customers  reduce  the 
extraordinary  amount  of  credit-accommodations  ex- 
tended to  them  by  the  banks. 

With  the  foregoing  canons  of  critical  judgment 
before  us,  the  following  proposed  measures  will  be 
discussed  in  the  order  set  out:  (i)  The  Baltimore 
Plan;  (2)  the  Carlisle  Plan;  (3)  the  Fowler  Bill  of 
1897;  (4)  ^he  plan  of  the  Monetary  Commission  of 

the  Indianapolis  Convention,  1898; 
aitZr'  ^'''       (5)  the  McCleary  Bill  of  1898 ;  (6)  the 

Gage  Bill  of  1900;  (7)  the  Currency 
Act  of  1900;  (8)  the  Fowler  Bills  of  1902  and  1903; 
and  (9)  the  Payne  Bill  of  1903.  In  taking  them  up 
for  detailed  discussion,  it  should  be  held  in  mind  that 
at  the  time  the  Baltimore  Plan  was  proposed,  con- 
flicting legislation  had  brought  the  Treasury  into 
financial  disrepute  and  shaken  confidence  in  its 
credit-issues.  The  Currency  Law  of  1873  had  es- 
tablished the  gold  standard  and  had  made  it  the 
duty  of  the  Treasurer  to  maintain  all  issues  at  par, 
but  the  only  means  placed  in  the  hands  of  the 
Treasury  to  do  this  was  the  gold-reserve  fund  ($100,- 
000,000    for    redemption    of    United    States    notes 


266       THE  BANK  AND  THE  TREASURY 

created  by  the  Resumption  Act  of  1878)  and  the 
loan  power  given  to  the  Secretary.  Notwithstanding 
this  and  the  fall  in  the  price  of  silver,  measure  after 
measure  by  Congress  was  made  law  which  forced 
into  circulation  such  volumes  of  silver  and  silver 
obligations  as  to  render  impossible  the  maintenance 
of  parity  of  money-issues  by  means  of  the  fund  at 
the  Treasurer's  disposal.  The  results  were  a  vio- 
lent shock  to  national  credit,  Government  bor- 
rowing to  support  an  inadequate  reserve,  and  the 
sound  money  campaign. 

The  Baltimore  Plan 

Just  emerging  from  this  situation  the  Baltimore 
Plan  (a  proposition  made  by  a  committee  of  bankers 
to  the  American  Bankers'  Association  meeting  at 
Baltimore  in  October,  1897)  became  a  subject  of 
general  interest.  Though  primarily  intended  as  a 
currency  measure,  the  plan  proposed  also  bears  a 
close  relation  to  the  bank,  since  the  Treasury  prob- 
lem was  to  be  solved  by  placing  its  burdens  on  the 
bank.  Currency  was  to  be  furnished  to  the  country 
by  permitting  the  banks  to  issue  to  the  extent  of 
seventy-five  per  cent  of  their  capital.  No  bond  de- 
posits with  the  Treasury  were  to  be  required,  (i)  be- 
cause the  National  debt  was  fast  being  paid,  and 
(2)  because  it  was  thought  the  currency  could  just 
as  well  be  secured  and  the  fluctuating  demands  could 
better  be  met  without  such  a  provision.     To  make 


EFFORTS  TO  MAKE  FURTHER   ADAPTATIONS    2G7 

the  bank  currency  "sound,"  current  redemptions 
were  to  be  made  through  the  Treasury  out  of  a  five 
A  sound  cur-  V^^  ^^^^  "redemption  fund"  as  at 
rency  provided  present.  UUimate  redemption  was  to 
'^^  be  provided  for  by  the  creation  of  a 

common  "guarantee  fund"  equal  to  five  per  cent  of 
the  total  circulation,  and  by  making  the  issues  of 
each  bank  a  first  lien  on  its  assets.  This  would  have 
met  every  requirement  as  to  soundness,  since  so  long 
as  the  bank  remained  solvent  the  redemptions  would 
currently  be  met  out  of  the  "redemption  fund,"  and 
as  soon  as  the  bank  became  insolvent  the  very  cause 
of  its  insolvency  (credit  expansion)  would  add 
strength  to  the  notes;  that  is,  the  greater  the  credit 
liabilities  incurred  by  the  bank  the  greater  would  be 
the  amount  of  the  assets  acquired  on  which  the  note- 
holders would  have  a  first  lien. 

In  the  event  of  the  adoption  of  this  plan,  therefore, 
sound  currency  would  have  been  obtained  through 
decreased  banking  strength.  The  capital  of  institu- 
tions created  for  the  purpose  of  supplying  sound 
commercial  credit-accounts  to  the  community  would 
have  been  impaired  by  using  it  to  capitalize  the 
credit  currency  issues — to  do  for  the  credit-money 
Sound  currency  circulation  what  the  Treasury  had 
at  the  expense  oj  failed  to  do.  By  placing  their  re- 
banking  strength  ^^^^^^^  ^^^^  ^^  ^^^  ^^^^^  circulation 

their  banking  capital  would  have  been  encumbered 
and  to  that  extent  rendered  unavailable  for  support 


268  THE   BANK  AND   THE  TREASURY 

of  credit-accounts — the  true  banking  purpose.  This 
impairment  would  have  resulted  in  two  ways:  (i)  By 
permitting  the  banks  to  issue  notes  equal  to  seventy- 
five  per  cent  of  their  capital  and  to  use  these  notes 
for  money,  their  current  money  needs  would  have 
been  met  by  their  own  obligations  to  deliver  legal- 
tender  or  standard  money  in  the  future  —  thus  en- 
couraging low  capitalization;  (2)  by  making  these 
note-issues  a  first  lien  on  commercial  assets  and 
requiring  no  deposit  or  specific  reservation  of  capital 
assets  for  their  ultimate  redemption,  the  capital 
assets  to  be  used  for  banking  support  as  well  as  the 
commercial  assets  for  the  final  redemption  of  out- 
standing accounts  would  be  reduced  without  making 
this  fact  apparent  to  the  public. 

Provision  was  made  for  elasticity  in  money-supply 
by  permitting  the  banks  to  issue  notes  equal  in 
amount  to  fifty  per  cent  of  their  capital  at  a  nominal 

tax  (one-half  of  one  per  cent  per  an- 
Provisions  for  \         ^  r     •  t_        i.i  •  i. 

elasticity  num) ,  and  for  issues  above  this  amount 

subject  to  a  tax  heavy  enough  to  com- 
pel retirement  except  when  money  rates  were  high. 
This  was  a  true  principle  for  an  ''emergency  circula- 
tion," and  the  amount  provided  would  have  been 
adequate  to  supply  all  ordinary  money-demands. 
But  if  at  any  time  an  extraordinary  demand  were 
made  for  standard  money  this  emergency  currency 
would  have  been  an  added  cause  for  the  contraction 
of  credit-accommodations.     In  other  words,  while 


EFFORTS  TO  MAKE   FURTHER   ADAPTATIONS    2G9 

the  method  proposed  provided  for  an  increase  in 
credit-money  circulation  to  meet  the  bank's  fluctuat- 
ing money-demands,  it  did  not  provide  for  an  ex- 
panding standard  money  base  of  credit  expansion;  it 
did  not  provide  for  "elasticity"  in  the  very  sort  of 
funds  in  which  greatest  elasticity  is  required  — 
credit-accounts.  As  a  banking  measure  it  was  weak, 
both  from  the  point  of  view  of  "soundness"  and  of 
"elasticity." 

The  Carlisle  Plan 

Under  similar  circumstances  Mr.  Carlisle  (then 
Secretary  of  the  Treasury)  suggested  a  measure  of 
relief.  Like  the  Baltimore  Plan,  this  was  also  in- 
The  primary  tended  to  solve  the  sound  money 
purpose  of  the  problem.  Again  the  Government  is- 
measure  ^^^^  were  to  be  strengthened  by  shift- 

ing the  credit-money  load  from  the  Treasury  reserves 
and  placing  it  on  the  banking- reserves.  Instead  of 
increasing  the  capital  support  of  the  Treasury  for 
meeting  its  own  current  monetary  obligations,  as  was 
finally  done  in  the  Currency  Law  of  1900,  the  credit 
issues  of  the  Government  were  to  be  supplanted  by 
credit-issues  of  the  banks.  Not  only  were  the 
National  banks  to  be  permitted  to  issue  notes  to  the 
amount  of  seventy-five  per  cent  of  their  capital  and 
surplus,  but  under  like  conditions  the  State  banks 
and  institutions  were  to  be  given  the  same  issue 
privileges. 


270  THE  BANK  AND  THE  TREASURY 

As  a  money  measure  this  one  was  also,  in  principle, 
eminently  ''sound."  Current  redemptions  were  to 
be  made  by  the  banks  and  through  such  agencies  as 
were  to  be  officially  designated.  Security  for  ulti- 
mate redemption  of  issues  was  to  be 
Sound  money  •!    j    t_  j  v      /•    --ri 

provisions  provided  by  a  deposit  of  Treasury 

issues  equal  to  thirty  per  cent  of  the 
amount  of  circulation  taken  out;  a  common  guaran- 
tee fund  was  also  set  up  similar  to  that  contained  in 
the  Baltimore  Plan,  and  the  notes  were  to  be  a  first 
lien  on  all  assets  and  on  the  contingent  stockholders' 
liability  of  the  individual  bank  issuing  them.  The 
notes,  therefore,  had  all  the  security  that  might  be 
desired. 

As  a  banking  measure,  all  that  has  been  said  con- 
cerning the  Baltimore  Plan  may  be  urged  with 
reference  to  this,  except  that  the  banking  capital 
would  not  be  so  seriously  impaired.  A  bank  must 
capitalize  thirty  per  cent  of  its  note-issues  before  ob- 
Unsoundness  oj  taining  them,  but  the  remaining 
the  plan  as  a  seventy  per  cent  of  notes  outstanding 
measure  -y^^ej-g  ^^  encumbrance  on  the  capital 
intended  for  commercial-credit  support.  The  banks 
were  to  assume  these  public  money  burdens,  which 
with  a  $100,000,000  gold-reserve  the  Treasury  had 
been  unable  to  bear  up  under,  and  without  making 
any  provision  for  an  increase  in  capital.  The  anoma- 
lous position  was  again  taken  that  what  had  proved 
a  burden  on  the  Treasury  would  not  prove  a  burden 


EFFORTS   TO  MAKE   FURTHER   ADAPTATIONS    271 

to  the  banks.  The  credit-accounts  of  the  banks 
were  to  be  sacrificed  as  a  means  of  giving  financial 
strength  to  the  money  circulation.  If  adopted,  the 
measure  woukl  have  crippled  the  banks  for  perform- 
ing the  commercial-credit  functions  for  which  they 
are  created. 

In  the  Carlisle  Plan  no  provision  was  made  for  an 
elastic  money  medium.  Every  inducement  was 
offered  the  banks  to  force  out  notes  and  to  make  them 
the  permanent  money  stock  of  the  community.  If 
they  failed  to  keep  out  all  their  notes  it  would  be  only 

because  the  country  could  not  use  as 
No  provision  for  ,  , ,  ^.i      •     j 

elasticity  much  money  as  they  were  authorized 

to  put  out,  and  in  case  the  full  amount 
were  absorbed,  then  no  provision  was  made  for  an 
increase.  But  even  if  they  did  not  succeed  in  keeping 
out  the  full  amount  of  the  authorized  issue  and  an 
extraordinary  demand  were  made  for  gold  or  legal- 
tender  issues  of  Government,  then  the  volume  of 
bank-notes  outstanding  would  force  a  contraction  of 
credit-accounts  as  a  means  of  obtaining  a  supply  of 
legal-tender  Government  issues  for  banking  reserves. 
Any  extraordinary  money-demand  would  therefore 
increase  the  weakness  of  the  credit-accounts  of  the 
banks  and  would  cause  still  more  violent  credit 

reactions. 

The  Fowler  Bill  of  1897 

Like  the  Carlisle  Plan,  the  Fowler  Bill  of  1897  was 
intended  to  relieve  the  Treasury  as  well  as  amend  the 


272       THE  BANK  AND  THE  TREASURY 

Bank  Act.  As  a  currency  measure  it  proposed  to 
supplant  completely  the  credit-issues  of  the  Treasury. 
This  was  to  be  accomplished  by  requiring  all  banks 

availing  themselves  of  the  issue-privi- 
The  general  plan  lege  to  purchase  and  surrender  to  the 

Treasury  for  cancellation,  legal-tender 
notes,  Treasury  notes  of  1890,  and  gold  certificates 
equal  to  their  "legal  reserve"  requirements,  and  to 
receive  in  return  an  equal  amount  of  gold  and  silver 
coins.  This  would  have  taken  care  of  the  Treasury 
issues  by  forcing  the  Government  to  pay  them.  The 
ordinary  money  requirements  for  general  circulation 
were  to  be  supplanted  by  bank-notes  secured  by 
bonds  ($700,000,000).  Besides  the  gold  and  silver 
banking-reserves,  and  the  bank-notes  for  general 
circulation,  an  "emergency  currency"  in  the  form  of 
bank-notes  was  provided  for  equal  to  the  combined 
capital  and  surplus  of  banks  availing  themselves  of 
the  issue-privilege.  This  emergency  currency  was  to 
be  taxed  at  a  graduated  rate  from  one  to  ten  per  cent, 
the  tax  ranging  from  six  to  ten  per  cent  after  the 
amount  of  issues  reached  sixty  per  cent  of  capitaliza- 
tion. As  the  average  rate  of  taxation  below  this 
amount  was  only  two  and  one-third  per  cent,  it  is  to 
be  presumed  that  at  least  sixty  per  cent  of  the  "emer- 
gency currency"  might  have  been  used  to  supply 
ordinary  money-demands,  only  the  amount  above 
sixty  per  cent  being  intended  for  retirement  after  the 
extraordinary  money-demands  had  passed. 


EFFORTS   TO  MAKE   FURTHER   ADAPTATIONS    273 

Considering  the  question  of  "soundness"  the 
Treasury  issues  were  practically  to  be  eliminated  by 
Sound  currency  payment.  The  bank-notes  were  to 
and  sound  kank-  be  partly  secured  by  bonds,  and  the 
ing  provisions  remainder  were  secured  by  a  first  lien 
on  assets  and  a  first  claim  against  stockholders. 
Besides,  a  common  guarantee  fund  was  to  be  created 
by  the  several  forms  of  tax  levies,  which  fund  was  to 
be  used  (i)  to  redeem  the  bond-secured  notes,  and 
(2)  for  the  redemption  of  emergency  notes.  This 
fund  was  to  take  the  place  of  the  bonds  as  they  were 
gradually  retired.  Provision  was  also  made  for  se- 
curing the  current  bank  liabilities  through  the  crea- 
tion of  an  insurance  fund  of  five  per  cent  of  the 
average  deposits.  The  customer  was  to  be  further 
protected  by  closer  supervision  and  control.  Branch- 
banking  was  to  be  permitted  under  conditions  which 
gave  the  public  the  same  protection  as  with  individual 
banks. 

Had  the  measure  become  a  law  and  been  enforced 
on  all  of  the  banks,  State  as  well  as  National,  the 
Treasury  would  have  been  completely  relieved  from 
its  credit-money  obligations,  a  sound  credit-money 
would  have  been  provided,  the  banking  reserve  re- 
quirements would  have  restricted  the 
Delects  m  the  credit-money-issues  to  the  amount  de- 
manded for  general  circulation,  the 
banks  would  have  been  forced  to  increase  their 
initial   capital,    and   an   increasing   capital   surplus 


274       THE  BANK  AND  THE  TREASURY 

would  have  been  accumulating  as  a  guarantee  fund 
for  note  redemptions.  Furthermore,  the  competi- 
tion between  the  banks  would  have  forced  them  to 
insure  their  accounts,  thus  again  increasing  the 
capital  surplus  for  the  protection  of  holders  of  credit- 
accounts,  and  the  interest  of  the  stronger  banks  in  a 
common  insurance  fund  would  have  forced  a  rigid 
inspection  and  official  control  of  the  affairs  of  the 
less  provident.  To  meet  these  requirements  the  rel- 
ative capitalization  of  banks  for  redemption  of  notes 
and  credit-accounts  must  have  at  least  doubled. 
But  the  law  had  two  weaknesses:  (i)  That  its  accept- 
ance by  National  banks  was  made  optional;  (2)  the 
capital  requirements  were  so  great  that  if  made  com- 
pulsory it  would  have  driven  all  National  banks  out 
of  business  in  competition  with  State  banks.  Such 
a  law  could  never  have  been  made  effective  unless 
State  and  private,  as  well  as  National  banking  institu- 
tions —  all  concerns  permitted  to  do  a  banking  busi- 
ness —  had  been  required  to  adopt  its  provisions  or 
as  a  penalty  for  non-acceptance  be  placed  under  a 
still  more  serious  disability. 

The  Plan  of  the  Monetary  Commission  oj  the 
Indianapolis  Convention 

Immediately  after  the  election  in  1896,  the  presi- 
dent of  the  Board  of  Trade  of  Indianapolis  issued  an 
invitation  for  a  National  sound  money  conference. 
In  response  a  convention  assembled   January   12, 


EFFORTS   TO   MAKE   FURTHER   ADAPTATIONS    275 

1897,  the  principal  result  of  which  was  the  appoint- 
ment of  a  commission  to  prepare  a  report  and  memo- 
rial representing  the  best  "sound  money"  ideals. 
As  a  part  of  their  work  a  bill  was  drafted,  which  was 
introduced  into  the  House  of  Representatives  by  Mr. 
Overstreet.  This  was  the  first  reflection  of  the  direct 
"  Soundness "  0}  spirit  of  the  campaign  which  required 
ZTply  provided  ^^  adequate  capitalization  of  Govern- 
jor  ment  credit-money-issues.  The  Treas- 

ury was  to  have  a  special  division  of  Issue  and  Re- 
demption, to  which  were  to  be  transferred  all  funds 
created  for  the  redemption  of  Government  monetary 
obligations.  The  outstanding  issues  were  to  be  made 
sound  by  transferring  from  the  general  fund  to  this 
division  gold  to  the  amount  of  twenty-five  per  cent 
of  all  United  States  and  Treasury  notes  of  1890. 
Silver  coins  and  silver  certificates  were  to  be  made 
exchangeable  for  gold,  and  besides  the  value  of  the 
silver  contained  in  the  coins  and  held  against  cer- 
tificates, five  per  cent  of  all  silver  obligations  was  to 
be  added  to  the  gold-reserve  to  insure  current  re- 
demption. This  solution  of  the  money  problem, 
however,  was  to  serve  a  temporary  purpose  only, 
since  the  gradual  retirement  of  all  obligations  of  the 
Treasury  except  silver  was  specifically  provided  for. 
The  ultimate  solution  of  the  money  problem  was  to 
be  by  the  same  method  as  proposed  in  the  Baltimore 
Plan,  —  to  shift  the  burden  of  money  issue  from  the 
Treasury  to  the  banks,  and  to  secure  their  payment 


276  THE   BANK   AND   THE   TREASURY 

by  a  current  ''redemption  fund"  (five  per  cent)  and 
a  common  "guarantee  fund"  (five  per  cent),  and  by 
making  the  issues  a  lien  on  all  assets  of  the  bank 
issuing  them,  besides  by  assessment  making  all  of  the 
banks  in  the  system  responsible  for  a  deficit.  The 
money  provision  was  eminently  "sound." 

The  "soundness"  of  the  commercial-credit  system 
was  not  so  well  guarded.  No  additional  capital 
strength  was  to  be  given  to  the  commercial  banks 
undertaking  to  carry  this  new  financial  load.  On 
the  other  hand  the  capital  requirements  of  banks 
were  to  be  distinctly  lowered.  The  bond  deposits 
to  be  originally  made  were  only  twenty-five  per  cent 
of  the  capital,  while  the  banks  were  to  be  permitted 
to  issue  to  the  full  amount  of  "unimpaired  capital." 
Banks  were  to  ^'^^  these  original  deposits  might  ulti- 
be  greatly  mately    be    withdrawn.     The    only 

wea  ene  banking  capital  that  was  to  be  set 

aside  for  note  redemption  was  the  five  per  cent  fund, 
which  was  not  to  be  counted  as  a  part  of  the  reserve 
for  the  redemption  of  credit-accounts. 

Elasticity  in  the  currency  was  to  be  attained  by 

taxing  all  notes  issued  above  sixty  per  cent  of  the 

capital  of  the  bank  issuing  them  at  six  per  cent.     In 

other  words,  sixty  per  cent  of  the  bank-notes  was 

^,     .  .  intended  to  supply  the  permanent  de- 

Elasttcity  .   .  .       ,     .  ,.  , 

mand  for  a  circulatmg  medium,  and 

forty  per  cent  of  the  authorized  issue  was  to  serve 

to  supply  extraordinary  demands  —  this  emergency 


EFFORTS   TO  MAKE   FURTHER   ADAPTATIONS    277 

currency  to  be  retired  through  the  autonomous 
action  of  the  tax  after  the  extraordinary  demand  had 
passed.  But  for  ultimate  redemption  in  standard 
money,  only  twenty-five  per  cent  of  the  banking  re- 
serve was  to  be  in  coin,  and  this  might  be  silver. 
Such  a  National  currency  provision  needs  no  further 
comment.  That  such  a  measure  would  not  in- 
crease the  elasticity  of  bank  credit-accounts  is  cer- 
tain. Under  circumstances  similar  to  those  that 
had  prevailed  when  the  Treasury  found  difficulty  in 
meeting  its  outstanding  obligations,  it  is  to  be  fairly 
presumed  that  our  National  credit  would  receive  a 
more   serious   shock   than   in    1893   and   the   years 

following. 

The  McCleary  Bill 

Closely  following  the  Commission  Bill  came  the 
McCleary  measure,  introduced  into  the  House  May 
II,  1898.  In  this  we  again  have  reflected  the  spirit 
of  the  campaign  of  1896.  In  its  Treasury  features  it 
was  almost  a  direct  copy  of  the  Commission  Bill.  By 
its  provisions  the  several  forms  of  issues  of  the 
Credit-money  to  Treasury  were  specifically  recognized 
he  made  sound  by  as  obligations  of  the  Government  to 
gold  redemption    ^^^  ^^j^  ^^  demand,  and  all  forms  of 

money-issue  were  to  be  made  interchangeable.  By 
this  the  financial  needs  of  the  Treasury  for  redemp- 
tion of  its  credit-issues  were  also  to  be  independently 
capitalized.  A  division  of  Issue  and  Redemption 
was  to  be  created,  similar  to  that  provided  for  in  the 


278  THE   BANK  AND   THE   TREASURY 

Act  of  1900;  this  was  to  be  made  guardian  of  the 
fund  created  to  protect  money  obligations.  The 
reserve  was  to  be  equal  to  twenty-five  per  cent  of  all 
legal- tender  notes,  and  silver  Treasury  notes  of  1890, 
and  five  per  cent  of  all  silver  coinage.  The  principle 
of  shifting  the  burden,  however,  was  not  abandoned. 
National  banks  were  to  be  permitted  to  obtain  notes 
on  deposit  of  bonds  as  at  present,  the  provision  being, 
however,  that  the  bonds  might  be  gradually  with- 
drawn. In  addition,  they  would  be  required  to  issue 
"reserve  notes"  to  an  amount  equal  to  at  least 
twenty-five  per  cent  of  their  capital,  on  deposit  of  an 
equal  amount  of  United  States  notes.  They  were  to 
receive  as  a  bonus  the  privilege  of  issuing  an  equal 
amount  of  "national  currency  notes"  not  to  exceed 
forty  per  cent  of  their  capitalization  —  the  total 
amount  of  note- issues  (bank-notes,  reserve  notes,  and 
currency  notes)  not  to  exceed  one  hundred  per  cent 
of  the  unimpaired  capital.  While,  therefore,  the 
Treasury  obligations  were  clearly  recognized,  and 
adequate  provision  was  made  for  their  redemption, 
every  inducement  was  given  to  the  banks  to  grad- 
ually assume  the  Government's  monetary  responsi- 
bilities. These  bank  issues  were  also  to  be  rendered 
"sound"  by  all  of  the  methods  before  suggested. 

As  with  the  measures  previously  proposed,  the 
McCleary  Bill  was  one  which  would  have  operated 
to  weaken  capital  support  to  bank  accounts  —  the 
principal  form  of  funds  with  which  business  is  done. 


EFFORTS   TO   MAKE   FURTHER   ADAPTATIONS     279 

The  amount  of  direct  capital  requirement  for  support 

of  money-issues,  however,  was  increased,  and  to  this 

extent  it  was  superior  to  the  several 
Results  on  sound     ,  .       ,  i       t-,    p 

bankinir  plans    previously    proposed.     Before 

issues  might  be  had,  the  bank  must 
invest  at  least  sixty  per  cent  of  the  amount  of  notes 
applied  for  in  collateral  securities  or  Government 
notes  for  deposit,  as  a  fund  for  final  redemption. 
The  bank  with  $100,000  capital  could  not  issue 
$100,000  of  notes  unless  it  first  purchased  $20,000  of 
bonds,  and  $40,000  of  United  States  notes.  Its 
available  ''cash"  from  such  a  capitalization,  there- 
fore, would  not  exceed  $140,000;  and  of  this  only 
$40,000  (the  emergency  circulation)  would  be  a  prior 
lien  on  the  other  assets  —  that  is  to  say,  $60,000  of 
capital-resources  would  be  left  for  the  final  redemp- 
tion of  current  banking  accounts.  The  notes  could 
not  wipe  out  the  entire  capital  and  leave  stranded  the 
holders  of  accounts.  In  addition  to  these  provi- 
sions, fifty  per  cent  of  the  "money-reserves"  of  the 
bank  was  required  to  be  in  gold  (double  the  amount 
of  coin  required  by  the  Commission  Bill),  thus  pre- 
venting gold  exportation  with  increasing  credit-issues. 
A  very  definite  provision  was  also  made  for  elas- 
ticity in  the  money  supply.  All  issues  over  eighty 
per  cent  of  capitalization  were  to  be  taxed  at  the  rate 
of  one-half  of  one  per  cent  per  month  or  six  per  cent 
per  annum.  This  would  have  been  adequate  to 
meet  all  usual  fluctuations  in  money-demand.     As  a 


280       THE  BANK  AND  THE  TREASURY 

funding  measure  its  weakness  lay  in  decreasing 
rather  than  increasing  the  capital  support  to  be  pro- 
Elasticity  pro-  vided  for  in  the  banking  business  —  a 
vided  for  in  the  capital  support  which  had  proved  too 
currency  weak    to    sustain    credit-accounts   in 

time  of  financial  strain. 

The  Gage  Bill 

Secretary  Gage's  measure  for  currency  reform  was 
the  immediate  forerunner  of  the  Currency  Act  of 
1900,  which  adequately  capitalized  the  Treasury  to 
protect  its  credit-issues.  It  contained  the  provisions 
proposed  by  the  Monetary  Commission  Bill  and  the 
McCleary  Bill  for  the  erection  of  a  special  division  of 
Capitalization  0}  the  Treasury  to  be  known  as  the 
currency  de-  "Division  of  Issue  and  Redemption." 
mands  ^^  ^^{is  division  was  to  be  transferred 

$125,000,000  in  gold,  to  be  held  in  trust  for  the  re- 
demption of  Treasury  credit-issues,  and  a  lien  was  to 
be  given  on  the  general  fund  to  reimburse  the  reserve 
fund  for  redemptions  made.  It  was  deficient,  how- 
ever, in  specific  provisions  for  support  of  the  general 
fund. 

Secretary  Gage  still  clung  to  the  idea  of  ultimately 
relieving  the  Treasury  from  credit-money  functions 
by  enlarging  the  bank-note  circulation  and  shifting 
the  financial  burdens  of  the  Government  on  the 
banks.  To  the  end  of  encouraging  the  banks  to 
supply  the  ordinary  money-demands,  they  were  to  be 


EFFORTS   TO  MAKE   FURTHER  ADAPTATIONS     281 

permitted  to  issue  to  the  minimum  amount  of  fifty 
per  cent  of  their  capital,  on  deposit  of  bonds,  United 
Bank  issues  to  States  notes.  Treasury  notes  of  1890, 
supplant  Treas-  and  silver  certificates,  and  after  which 
ury  issues  minimum  amount  had  been  reached, 

to  permit  an  additional  issue  of  twenty-five  per  cent 
of  such  deposits  without  further  collateral  security 
—  i.e.,  two- thirds  of  the  issues  were  to  be  collaterally 
secured.  The  total  issues  were  not  to  exceed  the 
amount  of  the  paid-up  capital.  For  the  current  re- 
demption of  bonds  a  ten  per  cent  fund  was  to  be 
deposited  with  the  Treasurer.  For  final  redemption 
a  guarantee  fund  was  provided  for  by  taxing  the 
''unsecured  circulation"  two  per  cent  per  annum;  a 
lien  was  to  be  given  on  the  general  assets  of  the  bank 
of  issue ;  and  the  notes  were  to  be  guaranteed  by  the 
Government.  As  in  the  other  plans  proposed,  the 
notes  were  to  be  "sound"  beyond  question. 

As  a  banking  measure  it  was  the  same  in  kind  as 
those  which  had  preceded,  but  better  in  a  degree,  in 

that  it  required  the  banks  to  capitalize 
Banking  features  a  minimum  of  sixty-six  per  cent  of  the 

gross  amount  of  issues  by  collateral 
deposits,  and  a  ten  per  cent  redemption  fund;  they 
were  also  required  to  c  reate  a  surplus  fund  for  the 
guarantee  of  ultimate  payment  of  notes.  While  it 
was  a  stronger  banking  measure  than  the  several 
previous  propositions,  it  was  weaker  than  the  National 
Bank  Act.    No  provision  was  made  for  increasing 


282  THE  BANK  AND  THE  TREASURY 

capitalization,  while  the  banks  were  to  be  encouraged 
to  do  a  larger  credit  business  proportionate  to  capital 
invested  —  to  further  encumber  the  resources  used 
for  current  banking  equipment.  It  is  a  logical  con- 
clusion that  if  such  a  measure  had  become  a  law, 
whatever  could  have  been  gained  by  increasing 
elasticity  in  the  money  circulation  would  be  more 
than  lost  in  decreased  ability  to  extend  business 
accommodations. 

The  Currency  Act  oj  igoo 

This  was  the  first  bill  which  did  not  confuse  the 
functions  and  obligations  of  the  two  independently 
organized  national  funding  institutions  —  the  Treas- 
ury and  the  National  bank.  It  was  a  measure  di- 
rectly in  line  with  the  evolution  of  American  financial 
ideals  of  the  century.  The  people  had  given  unmis- 
takable expression  to  opinion  with  respect  to  the 
Treasury  and  its  obligations  —  since  the  passage  of 
the  National  Bank  Act  they  had  not  directly  con- 
sidered the  bank.  Four  years  after  the  election  of 
1896  the  first  positive  legislation  pertaining  to  the 
currency  was  spread  on  the  statute  books,  reaffirming 
the  gold  standard  law  of  1873,  and  providing  for  the 
Credit-issues  0} the  redemption  of  credit- money-issues  in 
sound  by  adequate  V,'^^^-  A  negative  measure  had  pre- 
capitalization  viously  passed  repealing  the  Sherman 
Act,  thereby  relieving  the  Treasury  from  increasing 
burdens   in  the  form  of  silver  obligations,   but  the 


EFFORTS   TO  MAKE  FURTHER  ADAPTATIONS    283 

Act  of  1900  undertook  adequately  to  capitalize  the 
redemption  demands  of  the  Treasury,  At  that  time 
there  were  outstanding  about  $1,000,000,000  of  credit- 
issues.  To  provide  for  current  redemptions  of  the 
different  forms  of  monetary  obligations,  the  device 
suggested  by  the  Monetary  Commission,  by  the 
McCleary  Bill  and  by  the  Gage  Bill  was  adopted, 
creating  a  special  department  of  the  Treasury  to  be 
known  as  the  Division  of  Issue  and  Redemption,  and 
to  this  was  transferred  $150,000,000  of  gold  coin 
(about  fifteen  per  cent  of  the  credit-issues  to  be  re- 
deemed). To  guarantee  ultimate  redemption  of  all 
Treasury  obligations,  the  Secretary  was  enjoined  at 
all  times  to  maintain  the  value  of  issues  at  a  par  with 
gold,  and  as  a  means  to  this  end  gave  to  the  Division 
of  Issue  and  Redemption  a  first  lien  on  all  revenue 
funds  of  the  Government ;  collateral  to  this,  the  Law 
placed  in  the  hands  of  the  Secretary  of  the  Treasury 
the  power  to  make  unlimited  use  of  the  credit  of  the 
Government  to  procure  gold  to  replenish  the  general 
fund  whenever  such  might  be  found  necessary  to 
reimburse  the  Division  of  Issue  for  redemptions. 
The  effect  of  this  Act  was  to  fortify  the  Treasury 
issues  against  all  possibility  of  discredit,  and  to  place 
behind  the  public  institution  of  credit-money  circu- 
lation the  united  revenue  and  loan  powers  of  the 
nation. 


284       THE  BANK  AND  THE  TREASURY 

TJte  Fowler  Bills  oj  1902  and  1903 

After  the  enactment  of  the  gold  standard  currency 
Law  of  1900  the  two  bills  which  take  title  from  the 
Chairman  of  the  Committee  on  Currency  and  Bank- 
ing come  as  voices  from  the  tomb.  The  Currency 
Act  of  1900  was  in  direct  line  with  the  development 
of  our  funding  system  and  had  finally  established  the 
credit  currency  of  the  country  on  a  financially  sound 
basis.  There  remained  only  two  other  steps  to  be 
taken  to  perfect  the  adaptation  to  our  funding  needs, 
and  these  were  both  primarily  banking  questions: 
(i)  How  may  the  banks  obtain  money  to  meet  the 
extraordinary  money-demands  of  their  customers; 
and  (2)  how  may  they  equip  themselves  to  expand 
their  credit  to  meet  fluctuating  demands  for  credit- 
accommodation  and  at  the  same  time  maintain  safe 
proportionate  money-reserves  for  current  redemp- 
tions. Legislation  which  would  accomplish  these 
results  must  be  banking  legislation.  To  attain  either 
of  these  results  would  require  that  provision  be  made 
for  a  capitalized  reserve  which  would  be  adequate  to 
obtain  the  cash  necessary  both  for  increasing  the 
money  circulation  and  for  maintaining  increased 
credit-accounts.  That  such  reserve  must  be  a  capital 
reserve  follows  for  the  reason  that  a  reserve  of  assets 
acquired  in  exchange  for  bank-credit  would  defeat 
the  very  purpose  for  which  it  was  held  —  on  con- 
version of  such  a  reserve  commercial  accommoda- 


EFFORTS   TO   MAKE    FURTHER   ADAPTATIONS    285 

tions  would  be  reduced  instead  of  expanded.  The 
Fowler  Bills  referred  to  made  no  provision  for  either 
of  these  desirable  banking  results.  They  attempt 
again  to  solve  the  "sound  money"  problem  which 
was  already  solved  by  the  Currency  Act  of  1900. 
The  excuse  for  reopening  the  money  situation  is  to 
provide  "elasticity."  But  in  the  measures  proposed 
the  character  of  the  demand,  as  well  as  the  necessary 
means  successfully  to  meet  the  demand,  were  over- 
looked. The  first  principle  of  business,  so  far  as 
obtaining  money  is  concerned,  is  to  have  something 
to  offer  for  it.  The  measures  here  introduced  would 
permit  the  banks  when  in  straits  to  obtain  money 
from  the  Division  of  Issue  and  Redemption  to  meet 
demands  on  their  own  credit-accounts  without  hav- 
ing anything  to  pledge  for  it.  That  is,  the  banks 
would  be  relieved  from  doing  for  their  credit  what 
the  United  States  Treasury  had  found  it  necessary  to 
do  —  to  capitalize  their  redemption  demands,  and,  in 
lieu  of  the  current  redemption  reserve  proving  too 
small,  to  have  another  fund  or  reserve  which  it  might 
draw  upon  for  collateral  support.  A  large  part  of 
Mr.  Fowler's  Bills  was  designed  to  break  down  the 
Treasury  system  now  established  on  a  sound  basis, 
and  in  lieu  of  the  Treasury  reserve  to  do  what  many 
others  had  proposed  —  to  secure  the  bank-note  by 
depriving  the  bank  depositor  of  his  security.  It 
cannot  be  thought  that  such  a  system  will  ever  add 
to  the  "soundness"   (the  capital  strength)   of  our 


286       THE  BANK  AND  THE  TREASURY 

banking  institutions,  nor  that  increased  banking 
weakness  can  contribute  to  "elasticity"  in  bank- 
credit. 

The  Payne  Bill,  1903 

The  measures  proposed  by  Mr.  Payne  in  the  House 
and  by  Mr.  Aldrich  in  the  Senate  are  steps  in  the 
right  direction.  The  principle  here  invoked  is  one 
that  carries  with  it  the  largest  possibilities  for  elas- 
ticity, both  in  the  currency  and  in  bank-credit,  if 
carried  to  its  logical  conclusion.  The  Bill  proposed  to 
place  in  the  hands  of  the  Secretary  of  the  Treasury 
the  power  to  receive  from  banks  invested  capital 
reserves  ("bonds  of  the  United  States,  bonds  or 
other  interest-bearing  obligations  of  any  State  of  the 
United  States,  or  any  legally  authorized  bonds  for 
municipal  purposes  .  .  .  which  for  a  period  of  ten 
years  previous  to  such  deposit  has  not  defaulted 
.  .  .  and  the  first  mortgage  bonds  of  any  railroad 
company  which  had  paid  dividends  of  not  less  than 
four  per  centum  per  annum  regularly  and  continu- 
ously on  its  entire  capital  stock  for  a  period  of  not 
less  than  ten  years")  as  collateral  for  loans.  The 
banks  were  to  be  encouraged  to  carry  surplus  capital- 
resources  in  the  form  of  gilt-edge  securities.  A 
bank,  therefore,  which  is  not  suffering  from  under- 
capitalization, which  has  not  already  increased  its 
credit-obligations  beyond  a  safe  proportion  to  total 
unimpaired  capital  (capital  available  for  redemp- 
tions) even   though  its  cash  reserve  provided   for 


EFFORTS   TO  MAKE  FURTHER   ADAPTATIONS    287 

current  redemptions  were  threatened,  could  obtain 
the  cash  needed.  If  it  had  an  invested  capital-reserve 
to  fall  back  upon  it  might  immediately  convert  this 
into  cash  at  the  Treasury.  Assuming  this  measure 
had  passed,  that  it  had  been  supplemented  by  a  law 
which  restrained  banks  from  incurring  credit  liabili- 
ties to  exceed  three  or  four  times  its  unimpaired 
capital,  and  that  it  were  also  required  to  keep  this 
redemption  capital  "reserved"  in  the  form  of  cash, 
or  investments  such  as  the  Treasury  would  receive, 
under  such  circumstances  the  bank  would  be  re- 
quired to  capitalize  its  customers'  greatest  needs. 
It  would  at  times  of  low  credit-demand  have  a  capital 
reserve  largely  in  excess  of  the  requirement,  the  sur- 
plus of  which  could  be  invested.  This  would  place 
in  the  hands  of  the  banks  the  power  to  increase  the 
money  circulation  and  credit-accommodations  at  any 
time  an  increase  in  money  or  credit-funds  was 
needed,  and  with  entire  safety  to  the  community. 
By  such  an  extension  of  the  principle  we  would  have 
attained  for  our  funding  system  both  elasticity  and 
increased  financial  stability. 

The  measure  proposed  by  Mr.  Payne  is  essentially 
an  amendment  of  the  Bank  Act.  If  the  amendment 
were  so  changed  as  to  permit  the  issue  of  Treasury 
notes  (whether  they  be  in  the  form  of  bank-notes, 
greenbacks,  currency  certificates,  or  what  not),  as 
well  as  to  deposit  (loan)  its  revenue  surplus  against 
such  collaterals,  then  the  question  of  general  Treas- 


288  THE  BANK  AND  THE   TREASURY 

ury  condition  would  be  completely  eliminated.  Fur- 
ther, if  interest  were  to  be  charged  on  such  loans  at 
the  rate  of,  not  one  and  one-half  per  cent,  as  pro- 
posed, but  five  or  six  per  cent,  the  notes  issued  — 
whatever  their  form  —  would  be  promptly  retired 
when  they  were  not  needed  for  circulation. 

The  Payne  measure  (together  with  an  extension  of 
the  same  principle  to  include  increased  capitalization 
of  banking  needs,  and  a  proper  interest  charge  on 
emergency  issues)  would  do  for  bank  credit-funds 
and  for  the  business  of  banking  (selling  commercial 
credit-accommodations  at  a  profit)  what  the  Cur- 
rency Law  of  1900  has  done  for  our  credit-money. 
An  adequate  capitalization  of  bank  credit-accounts 
would  complete  the  evolution  in  the  American  fund- 
ing system,  adapting  it  to  the  nation's  fluctuating 
business  needs. 


APPENDIX  OF   DOCUMENTS 


"THE  BALTIMORE  PLAN"  OF  CURRENCY 
REFORM 

1896 

OUTLINES  OF  THE   PLAN 

(Digest  taken  jrom  ^^ Sound  Currency''^) 

Section  i.  The  provision  of  the  National  Bank  Act  re- 
quiring the  deposit  of  bonds  to  secure  circulating  notes  here- 
after issued,  shall  be  repealed. 

Sect.  2.  Allow  the  banks  to  issue  circulating  notes  to  the 
amount  of  50  per  cent  of  their  paid  up,  unimpaired  capital, 
subject  to  a  tax  of  one-half  of  i  per  cent  per  annum  upon  the 
average  amount  of  circulation  outstanding  for  the  year;  and  an 
additional  circulation  of  25  per  cent  of  their  paid-up,  unim- 
paired capital,  subject  both  to  the  tax  of  one-half  of  i  per 
cent  per  annum  and  to  an  additional  heavy  tax  per  annum 
upon  the  average  amount  of  such  circulation  outstanding 
for  the  year;  said  additional  25  per  cent  to  be  known  as  "emer- 
gency circulation." 

Sect.  3.  The  tax  of  one-half  of  i  per  cent  per  annum  upon 
the  average  amount  of  circulation  outstanding  shall  be  paid 
to  the  Treasurer  of  the  United  States  as  means  of  revenue, 
out  of  which  the  expense  of  the  office  of  the  Comptroller  of 
the  Currency,  the  printing  of  circulating  notes,  etc.,  shall  be 
defrayed. 

The  excess  over  one-half  of  i  per  cent  of  the  tax  imposed 
upon  the  "emergency  circulation"  shall  be  paid  into  the 
"guarantee  fund,"  referred  to  in  Sect.  6. 

Sect.  4.  The  banks  issuing  circulation  shall  deposit  and 
maintain  with  the  Treasurer  of  the  United  States  a  "redeni]) 

[291] 


292  APPENDIX 

tion  fund"  equal  to  5  per  cent  of  their  average  outstanding 
circulation,  as  provided  for  under  the  existing  law. 

Sect.  5.  The  redemption  of  the  notes  of  all  banks,  solvent 
or  insolvent,  to  be  made  as  provided  for  by  the  existing  law. 

Sect.  6.  Create  a  "guarantee  fund"  through  the  deposit 
by  each  bank  of  2  per  cent  upon  the  amount  of  circulation 
received  the  first  year.  Thereafter  impose  a  tax  of  one-half 
of  I  per  cent  upon  the  average  amount  of  outstanding  circu- 
lation, the  same  to  be  paid  into  this  fund  until  it  shall  equal 
5  per  cent  of  the  entire  circulation  outstanding,  when  the  col- 
lection of  such  tax  shall  be  suspended,  to  be  resumed  when- 
ever the  Comptroller  of  the  Currency  shall  deem  it  necessary. 

The  notes  of  insolvent  banks  shall  be  redeemed  by  the 
Treasurer  of  the  United  States  out  of  the  "guarantee  fund," 
if  it  shall  be  sufficient,  and,  if  not  sufficient,  then  out  of  any 
money  in  the  Treasury,  the  same  to  be  reimbursed  to  the 
Treasury  out  of  the  "guarantee  fund,"  when  replenished, 
either  from  the  assets  of  the  failed  banks  or  from  the  tax  afore- 
said. 

National  banking  associations,  organized  after  this  plan 
shall  have  gone  into  operation,  may  receive  circulation  from 
the  Comptroller  of  the  Currency  upon  paying  into  the  "guar- 
antee fund"  a  sum  bearing  the  ratio  to  the  circulation  applied 
for  and  allowed  that  the  "guarantee  fund"  bears  to  the  total 
circulation  outstanding,  and  to  be  subject  to  the  tax  of  one- 
half  of  I  per  cent  per  annum,  as  called  for  by  the  Treasurer 
of  the  United  States  for  the  creation  and  maintenance  of  this 
fund. 

No  association  or  individual  shall  have  any  claim  upon  any 
part  of  the  money  in  said  "guarantee  fund,"  except  for  the 
redemption  of  the  circulating  notes  of  any  insolvent  national 
banking  association.  Any  surplus  or  residue  of  said  "guar- 
antee fund"  which  may  be  hereafter  ascertained  or  deter- 
mined by  law  shall  inure  to  the  benefit  of  the  United  States. 

Sect.  7.  The  Government  shall  have  a  prior  lien  upon  the 
assets  of  each  failed  bank  and  upon  the  liability  of  shareholders, 
and  for  the  purpose  of  restoring  the  amount  withdrawn  from 


APPENDIX  293 

the  "guarantee  fund"  for  the  redemption  of  its  circulation, 
not  to  exceed,  however,  the  amount  of  the  failed  bank's  out- 
standing circulation  after  deducting  the  sum  to  its  credit  in 
the  "redemption  fund"  (Sect.  4)  already  in  the  hand  of  the 
Treasurer  of  the  United  States. 

Sect.  8.  Circulation  can  be  retired  by  a  bank  at  any  time 
upon  depositing  with  the  Treasurer  of  the  United  States  law- 
ful money  in  amount  equal  to  the  sum  desired  to  be  with- 
drawn, and  immediately  upon  such  deposit  the  tax  indicated 
in  Sects.  2,  3  and  6  shall  cease  upon  the  circulation  so  retired. 

Sect.  9.  In  the  event  of  the  winding  up  of  the  business  of 
a  bank  by  reason  of  insolvency,  or  otherwise,  the  Treasurer 
of  the  United  States,  with  the  concurrence  of  the  Comptroller 
of  the  Currency,  may,  on  the  application  of  the  directors,  or 
of  the  liquidator,  receiver,  assignee,  or  other  proper  official, 
and  upon  being  satisfied  that  proper  arrangements  have  been 
made  for  the  payment  of  the  notes  of  the  bank  and  any  tax 
due  thereon,  pay  over  to  such  directors,  liquidator,  receiver, 
assignee,  or  other  proper  official,  the  amount  to  the  credit  of 
the  bank  in  the  "redemption  fund"  indicated  in  Sect.  4. 


"THE  CARLISLE  PLAN" 

1896 

Be  it  enacted  by  the  Senate  and  House  oj  Representatives  of 
the  United  States  oj  America  in  Congress  assembled: 

That  so  much  of  all  acts  and  parts  of  acts  as  require  or 
authorize  the  deposit  of  United  States  bonds  to  secure  circu- 
lating notes  issued  by  national  banking  associations,  or  as 
require  such  associations  to  deposit  or  keep  on  deposit  United 
States  bonds  for  any  purpose  except  as  security  for  public 
money,  be,  and  the  same  are  hereby,  repealed  as  to  associa- 
tions taking  circulation  under  this  Act;  and  notes  issued  under 
this  Act  shall  not  contain  the  statement  that  they  are  so  secured. 

Sect.  2.   That  any  national  banking  association  ....  may 


294  APPENDIX 

take  out  circulating  notes  to  an  amount  not  exceeding  75  per 
centum  of  its  paid-up  and  unimpaired  capital  upon  deposit- 
ing with  the  Treasurer  of  the  United  States  currency  certifi- 
cates ....  or  United  States  legal-tender  notes,  including 
Treasury  notes  ....  and  other  lawful  money  of  the  United 
States,  at  the  discretion  of  the  Secretary  of  the  Treasury,  as 
a  guaranty  fund  equal  to  30  per  centum  of  the  circulating 
notes  applied  for.  The  association  making  such  deposit  shall 
be  entitled  to  receive  from  the  Comptroller  of  the  Currency 
circulating  notes  in  blank,  registered  and  countersigned  as 
provided  by  lavi^;  and  all  such  notes  shall  constitute,  and  are 
hereby  declared  to  be,  a  first  lien  upon  all  the  assets  of  the 
association  issuing  the  same.  .  .  . 

Sect.  4.  That  each  national  banking  association  shall  re- 
deem its  notes  at  par  on  presentation  at  its  own  office  and  at 
such  agencies  as  may  be  designated  for  that  purpose  by  the 
Comptroller  of  the  Currency;  and  whenever  such  association 
desires  to  retire  the  whole  or  any  part  of  its  circulation,  the 
notes  to  be  retired  shall  be  forwarded  to  the  Comptroller  of 
the  Currency  for  cancellation,  and  thereupon  a  sum  equal  to 
30  per  centum  of  such  cancelled  notes  shall  be  returned  to 
the  association,  in  lawful  money  of  the  United  States.  .  .  . 

Sect.  5.  That  in  order  to  provide  a  safety  fund  for  the 
prompt  redemption  of  the  circulating  notes  of  failed  national 
banking  associations  each  such  association  ....  shall  pay 
the  Treasurer  of  the  United  States,  ....  a  tax  of  one-fourth 
of  I  per  centum  for  each  half  year  upon  the  average  amount 
of  its  circulating  notes  outstanding,  ....  until  the  said  fund 
amounts  to  a  sum  equal  to  5  per  centum  upon  the  total  amount 
of  such  national  bank  notes  outstanding,  and  thereupon  the 
collection  of  said  tax  shall  be  suspended All  circulat- 
ing notes  of  failed  national  banks  taken  out  under  this  Act 
not  redeemed  on  presentation  to  the  Treasury  of  the  United 
States,  or  an  assistant  treasurer  of  the  United  States,  shall 
bear  interest  at  the  rate  of  6  per  centum  per  annum  from  the 
date  of  suspension  of  the  bank  until  thirty  days  after  public 
notice  has  been  given  that  funds  are  on  hand  for  their  redemp- 


APPENDIX  295 

tion,  and  such  notes  shall  constitute  a  first  Hen  upon  all  moneys 
thereafter  received  into  the  safety  fund. 

Sect.  7.  That  every  national  banking  association  hereto- 
fore organized  and  having  bonds  on  deposit  to  secure  circu- 
lation may  withdraw  such  bonds  upon  the  deposit  of  lawful 
money  of  the  United  States,  as  now  provided  by  law;  and  there- 
after such  association  may  take  out  circulation  under  this 
Act  and  be  entitled  to  all  rights,  privileges,  and  immunities 
herein  conferred. 

Sect.  9.  That  the  Secretary  of  the  Treasury  may,  in  his 
discretion,  use  from  time  to  time  any  surplus  revenue  of  the 
United  States  in  the  redemption  and  retirement  of  United 
States  legal-tender  notes,  and  notes  issued  under  the  Act  of 
July  14,  1890,  but  the  amount  of  such  notes  retired  shall  not 
in  the  aggregate  exceed  an  amount  equal  to  70  per  centum  of 
the  additional  circulation  taken  out  by  national  banks  and 
State  banks  under  the  provisions  of  this  Act 

Sect.  10.  That  the  use  of  circulating  notes  of  and  above 
the  denomination  of  ten  dollars  issued  by  a  banking  corpora- 
tion duly  organized  under  the  laws  of  any  State,  and  which 
transacts  no  other  than  a  banking  business,  shall  be  exempt 
from  taxation  under  the  laws  of  the  United  States  when  it  is 
shown  to  the  satisfaction  of  the  Secretary  of  the  Treasury 
and  the  Comptroller  of  the  Currency: 

First  —  That  such  bank  has  at  no  time  had  outstanding  iu 
circulating  notes  in  excess  of  75  per  centum  of  its  paid-up  and 
unimpaired  capital; 

Second  —  That  its  stockholders  are  individually  liable  for 
the  redemption  of  its  circulating  notes  to  an  amount  equal  to 
the  par  value  of  the  stock  owned  by  them ;  .  .  .  . 

Third  —  That  the  circulating  notes  constitute  by  law  a 
first  lien  upon  all  the  assets  of  the  bank; 

Fourth  —  That  the  bank  has  at  all  times  kept  on  deposit 
with  an  officer  of  the  State,  authorized  by  law  to  receive  and 
hold  the  same,  a  guaranty  fund  in  currency  certificates  issued 
under  Section  5193  of  the  Revised  Statutes  of  the  United 
States,  or  United  States  legal-tender  notes,  including  Treasury 


296  APPENDIX 

notes  of  1890,  equal  to  30  per  centum  of  its  outstanding  cir- 
culating notes;  and 

Fifth  —  That  it  has  promptly  redeemed  its  notes  at  par  on 
demand  at  its  principal  office,  or  at  one  or  more  of  its  branch 
offices,  if  it  has  branches. 

Whenever  the  Secretary  of  the  Treasury  and  the  Comptroller 
of  Currency  shall  be  satisfied  that  any  banking  corporation 
duly  organized  under  the  laws  of  any  State,  and  which  trans- 
acts no  other  than  a  banking  business  as  provided  in  this 
section,  has  been  incorporated  under  the  laws  of  the  State 
in  which  it  is  located,  and  that  such  laws  require 

First  —  That  its  stockholders  shall  be  individually  Hable 
for  the  redemption  of  its  circulating  notes  to  an  amount  equal 
to  the  par  value  of  the  capital  stock  owned  by  them; 

Second  —  That  the  circulating  notes  thereof  shall  constitute 
a  first  lien  upon  all  the  assets  of  the  bank;  and. 

Third  —  That  such  bank  shall  keep  on  deposit  at  all  times 
with  an  official  of  the  State  authorized  by  law  to  receive  and 
hold  the  same,  a  guaranty  fund  as  required  in  the  fourth  para- 
graph of  this  section.  There  shall  thereupon  issue  to  said 
bank  a  certificate  to  that  effect.  Said  bank  may  then  issue 
its  notes  .... 


FOWLER  BILL  OF  MARCH  15,  1897 

Be  it  enacted  by  the  Senate  and  House  oj  Representatives  of 
the  United  States  of  America  in  Congress  Assembled: 

That  there  shall  be  and  there  is  hereby  created  and  estab- 
lished a  Department  of  Finance,  which  shall  have  entire  and 
exclusive  control  and  supervision  of  all  national  debts,  their 
right  to  take  out  secured  circulation  and  issue  their  notes. 

Sect.  2.  That  there  shall  be  three  ministers  of  finance, 
who  shall  take  the  place  of  the  Comptroller  of  the  Currency 
and  constitute  a  board  of  finance;  and  said  board  of  finance 
shall  conduct  the  said  Department  of  Finance 

Sect.  3.   That  any  national  bank  now  doing  business,  or 


APPENDIX  297 

any  other  financial  institution  doing  a  similar  business,  .... 
may,  in  accordance  with  existing  law,  ....  organize  upon 
the  following  terms  and  conditions: 

If  any  corporation  or  association  of  persons  described  as 
aforesaid  shall  deposit  with  the  United  States  Government 
any  of  the  United  States  bonds  now  outstanding,  or  any  that 
may  be  hereafter  issued  which,  at  their  stated  value  as  herein 
set  forth,  ....  circulation  known  as  United  States  Govern- 
ment bond  notes  shall  be  issued  to  said  corporation  .... 

(a)  That  the  United  States  Government  bonds  now  out- 
standing shall  be  received  at  the  following  prices,  to  wit: 

2s,  reg Q,  Mar.  95^ 

4S,  1907,  reg Q,  Jan.  109^ 

4s,   1907,  coup Q,  Jan.  iio^ 

4S,  1925,  reg Q,  Feb.  120J 

4s,  1925,  coup Q,  Feb.  120^ 

5s,  1904,  reg Q,Feb.  113^ 

5s,  1904,  coup Q,  Feb.  1 13I 

6s,  cur'cy, '98,  reg J-&J-  io2f 

6s,  cur'cy,  '99,  reg J-  &  J-  105 

4s,  (Cher),  1897,  reg March  102 

4S,  (Cher),  1898,  reg March  102 

4s,  (Cher),  1899,  reg March  102 

and  that  from  and  after  the  passage  of  this  Act  said  bonds  shall 
be  received  upon  the  same  income  basis,  respectively. 

(6)  All  banks  organized  under  this  Act  shall  take  out  for 
issue  United  States  Government  bond-notes  in  proportion  to 
their  respective  capital  ....  and  each  bank  .shall  pay  into 
the  United  States  Treasury  one-fourth  of  i  per  centum  per 
annum  upon  the  notes  so  taken  out  for  issue  as  a  part  of  the 
fund  to  be  created  and  known  as  "United  States  National- 
Bank  Note  Redemption  Fund." 

Sect.  5.  That  at  the  same  time  that  said  corporation,  it 
located  in  a  reserve  city,  shall  deposit  United  States  Govern- 
ment bonds  as  aforesaid  it  shall  also  deposit  with  the  United 
States  Government  United  States  legal-tender  notes  or  gold 


298  APPENDIX 

certificates,  or  both,  of  such  an  amount  that  it,  together  with 
the  gold  said  corporation  has  on  hand,  will  equal  15  per 
centum  of  its  deposits ;  and  the  United  States  Government  shall 
deliver  to  said  corporation  gold  coin  in  lieu  of  said  legal- 
tender  notes  and  said  gold  certificates.  Said  corporation  shall 
also  deposit  at  the  same  time  with  the  United  States  Govern- 
ment United  States  Treasury  notes  or  United  States  silver 
certificates,  at  the  option  of  said  ministers,  or  both,  which, 
with  the  silver  coin  then  held  by  said  corporation,  shall  amount 
to  10  per  centum  of  its  deposits,  and  the  United  States  Govern- 
ment shall  deliver  to  said  corporation  in  Ueu  thereof  silver  coin 
of  an  equal  amount;  and  said  legal-tender  notes,  gold  certifi- 
cates, Treasury  notes,  and  silver  certificates  shall  be  thereupon 
cancelled.  Said  corporation  shall  thereafter  keep  as  a  reserve 
25  per  centum  of  its  deposits  in  the  following  kinds  of  money: 
At  least  60  per  centum  of  said  reserve  shall  be  in  gold  coin, 
and  the  remaining  40  per  centum  of  said  reserve  may  be  in 
silver  coin  or  United  States  Government  bonds  notes:  Pro- 
vided, however,  That  in  lieu  of  one-half  of  such  reserve  cash 
on  deposit,  subject  to  check,  may  be  held  in  reserve  cities. 

Sect.  6.  That  at  the  same  time  the  said  corporation,  if 
located  outside  a  reserve  city,  shall  deposit  United  States 
Government  bonds  as  aforesaid,  it  shall  also  deposit  with  the 
United  States  Government  United  States  legal-tender  notes, 
or  gold  certificates,  or  both,  of  such  an  amount  that  it,  together 
with  the  gold  coin  said  corporation  has  on  hand,  will  equal 
9  per  centum  of  its  deposits;  and  the  United  States  Govern- 
ment shall  deliver  to  said  corporation  gold  coin  in  lieu  of  said 
legal-tender  notes  and  said  gold  certificates.  Said  corporation 
shall  also  deposit  at  the  same  time  with  the  United  States 
Government  United  States  Treasury  notes  or  United  States 
silver  certificates,  at  the  option  of  said  ministers,  or  both, 
which,  with  the  silver  coin  then  held  by  said  corporation,  shall 
amount  to  6  per  centum  of  its  deposits,  and  the  United  States 
Government  shall  deliver  to  said  corporation  in  lieu  thereof 
silver  coin  of  an  equal  amount;  and  said  legal-tender  notes, 
gold  certificates.  Treasury  notes,  and  silver  certificates  shall 


APPENDIX  299 

be  thereupon  cancelled.  Said  corporation  shall  thereafter 
keep  as  a  reserve  1 5  per  centum  of  its  deposits  in  the  follow- 
ing kinds  of  money:  At  least  60  per  centum  of  said  reserve 
shall  be  in  gold  coin,  and  the  remaining  40  per  centum  of 
said  reserve  may  be  in  silver  coin,  or  United  States  Govern- 
ment bond  notes:  Provided,  however,  That  in  lieu  of  one- 
half  of  such  reserve  cash  on  deposit,  subject  to  check,  may  be 
held  in  reserve  cities. 

Sect.  7.  That  the  United  States  shall  not  pay  out  or  reissue 
any  United  States  legal-tender  notes  or  gold  certificates  from 
and  after  the  ist  day  of  January,  eighteen  hundred  and  ninety- 
eight,  but  the  same  when  received  shall  be  cancelled  and 
destroyed;  and  further  that  the  United  States  Government 
shall  not  pay  out,  issue  or  reissue  any  United  States  Treasury 
notes  or  silver  certificates  from  and  after  the  ist  day  of  Januar}', 
eighteen  hundred  and  ninety-nine,  but  the  same  when  re- 
ceived shall  be  cancelled  and  destroyed. 

Sect.  8.  That  any  corporation  organized  under  this  Act 
may  ....  issue  its  own  circulation,  which  shall  be  furnished 
by  the  United  States  Government,  and  be  known  as  United 
States  national-bank  notes.  Said  United  States  national-bank 
notes  shall  be  issued  in  denominations  of  ten  dollars  and  mul- 
tiples thereof,  and  shall  be  a  first  lien  upon  the  assets  of  the 
bank  issuing  the  same,  and  also  upon  the  liability  of  the  stock- 
holders, and  may  be  issued  only  in  the  following  manner  and 
upon   the   following   conditions: 

First  —  Every  bank  issuing  United  States  national-bank 
notes  shall  at  all  times  maintain  against  the  amount  of  such 
notes  outstanding  a  reserve  corresponding  to  that  required 
against  its  deposits. 

Second  —  Any  bank  that  shall  have  complied  with  this  law 
may,  with  the  consent  and  under  the  supervision  and  control 
of  the  board  of  finance,  issue  an  amount  of  United  States 
national-bank  notes  equal  to  20  per  centum  or  one-fifth  of  its 
paid-up  and  unimpaired  capital,  and  shall  pay  upon  such  an 
amount  thereof  as  may  be  outstanding  at  any  time  a  tax  at  the 
rate  of  1  per  centum  per  annum. 


300  APPENDIX 

Third  —  Said  bank  may  issue  a  second  amount  of  such 
notes,  equal  to  20  per  centum  or  one-fifth  of  its  paid-up  and 
unimpaired  capital,  and  shall  pay  upon  such  an  amount  thereof 
as  may  be  outstanding  at  any  time  a  tax  at  the  rate  of  2  per 
centum  per  annum. 

Fourth  —  Said  bank  may  issue  a  third  amount  of  notes 
equal  to  20  per  centum  or  one-fifth  of  its  paid-up  and  unim- 
paired capital,  and  shall  pay  upon  such  an  amount  thereof  as 
may  be  outstanding  at  any  time  a  tax  at  the  rate  of  4  per 
centum  per  annum. 

Fifth  —  Said  bank  may  issue  a  fourth  amount  of  notes 
equal  to  20  per  centum  of  its  paid-up  and  unimpaired  capital, 
and  shall  pay  upon  such  an  amount  thereof  as  may  be  out- 
standing at  any  time  a  tax  at  the  rate  of  6  per  centum  per 
annum. 

Sixth  —  Said  bank  may  issue  a  fifth  amount  of  notes,  equal 
to  20  per  centum  or  one-fifth  of  its  paid-up  and  unimpaired 
capital,  and  shall  pay  upon  such  an  amount  thereof  as  may  be 
outstanding  at  any  time  a  tax  at  the  rate  of  8  per  centum  per 
annum. 

Seventh  —  If  the  amount  of  United  States  national-bank 
notes  issued  by  any  bank  shall  exceed  at  any  time  the  paid-up 
and  unimpaired  capital  of  said  bank,  a  tax  at  the  rate  of  10 
per  centum  per  annum  shall  be  paid  by  said  bank  on  such 
excess. 

Eighth  —  That  said  ministers  of  finance  are  hereby  author- 
ized and  empowered  to  suspend  one-half  of  said  tax  upon  any 
one  or  all  of  the  said  several  issues  of  United  States  national- 
bank  notes  at  any  time  after  nineteen  hundred  and  ten,  and 
at  any  time  after  nineteen  hundred  and  twenty  said  ministers 
of  finance  are  further  authorized  and  empowered  to  suspend 
any  portion  of  the  tax  then  remaining  except  the  10  per  centum 
tax  referred  to  in  paragraph  seven. 

Sect.  9.  That  all  taxes  so  paid  to  the  Government  upon 
said  United  States  Government  bond  notes  and  said  United 
States  national  bank  notes  shall  constitute  and  be  known  as 
the  "United  States  National-bank  Note  Redemption  Fund," 


APPENDIX  301 

and  be  held  exclusively  for  the  redemption,  first,  of  the  United 
States  Government  bond  notes;  second,  for  the  United  States 
national-bank,  notes  in  the  event  of  the  liquidation  of  any  bank 
organized  under  this  law:  Provided,  however,  That  when  said 
"redemption  fund"  shall  exceed  5  per  centum  of  both  the 
United  States  Government  bond  notes  and  the  United  States 
national-bank  notes  such  excess  shall  belong  to  the  United 
States  Government,  and  may  be  used  by  it  to  defray  its  general 
expenses. 

Sect.    13 Second  —  That   under   such    regulations 

and  restrictions  as  shall  be  established  by  the  said  ministers 
of  finance,  national  banks  organized  under  this  Act  may 
establish  branch  banks  by  and  with  the  consent  of  said  min- 
isters, such  branch  banks  to  have  the  right  to  receive  deposits, 
make  loans,  grant  discounts  and  buy  and  sell  exchange,  but  in 
no  case  to  be  permitted  to  issue  circulating  notes  other  than 
those  of  the  parent  bank.  It  shall  in  all  respects  be  considered 
as  a  part  of  the  parent  bank  and  in  each  case  where  such 
branches  are  maintained  the  ministers  of  finance  shall  receive 
in  the  reports  of  the  central  bank  a  statement,  properly  sworn 
to  and  attested,  of  the  condition  of  its  branches. 

Sect.  14.  First  —  That  in  the  event  of  the  liquidation  of 
any  national  bank  organized  under  this  Act  the  United  States 
Government  shall  redeem  upon  presentation,  after  notice  given 
as  herein  provided,  any  of  said  United  States  Government 
bond  notes  or  said  United  States  national-bank  notes,  re- 
imbursing itself  for  the  full  amount  thereof  out  of  the  assets  of 
said  bank,  and  distribute  the  remaining  assets  among  the  de- 
positors and  all  others  having  claims  in  the  same  manner  as 
now  provided  by  law. 

Second  —  That  from  the  time  of  the  suspension  of  said  bank 
up  to  the  date  set  by  said  ministers  of  finance  for  the  redemp- 
tion of  said  United  States  national-bank  notes,  they  shall  bear 
interest  at  the  rate  of  5  per  centum  per  annum.  Such  notice 
shall  be  given  in  some  newspaper  printed  in  the  clearing-house 
city  where  said  notes  were  cleared ;  but  nothing  herein  contained 
shall  be  construed  to  impose  any  liability  upon  the  Govern- 


30€  APPENDIX 

ment  of  the  United  States,  or  any  of  its  representatives,  beyond 
the  amount  available  from  time  to  time  out  of  said  "United 
States  National-bank  Note  Redemption  Fund." 

Sect.  15.  First  —  That  any  bank  organized  under  this 
Act  may  at  any  time  after  nineteen  hundred  and  five,  with  the 
consent  of  the  ministers  of  finance,  insure  its  depositors  against 
loss  by  paying  into  the  United  States  Treasury  i  per  centum 
upon  the  average  balance  of  deposits  of  the  preceding  fiscal 
year,  and  one-half  of  i  per  centum  upon  the  average  annual 
balances  thereafter  until  the  amount  so  paid  into  the  United 
States  Treasury  by  said  bank  shall  amount  to  5  per  centum 
of  the  average  balance  of  said  bank  for  the  last  preceding  year, 
and  that  said  ministers  of  finance  may  then  suspend  said  tax 
for  the  time  being.  If  the  deposits  of  said  bank  shall  increase, 
or  for  any  reason  the  amount  of  the  insurance  fund  to  the 
credit  of  said  bank  shall  be  less  than  5  per  centum  of  the 
deposits,  said  ministers  may  reimpose  said  tax  of  one-half  of 
I  per  centum  upon  the  deposits  of  said  bank;  and  if  said  bank 
shall  fail  to  pay  such  tax  at  any  time  after  the  payment  of  said 
I  per  centum  the  amount  already  paid  by  said  bank  shall  be 
forfeited  to  the  United  States  Government  and  the  insurance 
of  said  depositors  shall  thereupon  cease. 

Second  —  That  the  amounts  of  money  so  received  shall 
constitute  and  be  known  as  the  "Depositors'  Insurance  Fund." 

Sect.  21.  That  it  shall  be  unlawful  for  any  national  bank 
to  engage  in  the  promotion  of  any  enterprise,  or  to  loan  the 
funds  of  the  bank  upon  the  bonds  or  securities  of  incomplete 
and  partially  developed  projects  of  any  kind,  such  as  partially 
constructed  railroads,  street-car  lines,  electric-light,  gas,  water, 
mining,  manufacturing,  or  irrigation  plants. 


APPENDIX  303 

INDIANAPOLIS  MONETARY  COMMISSION  BILL 

January  6,  1898 
Be  it  enacted,  etc. : 

Sect.  4.  That  there  is  hereby  created  a  division  in  the 
Treasury  Department,  to  be  known  as  the  Division  of  Issue 
and  Redemption,  under  the  charge  of  an  Assistant  Treasurer 
of  the  United  States,  who  shall  be  appointed  by  the  President, 
by  and  with  the  advice  and  consent  of  the  Senate. 

Sect.  5.  That  to  the  Division  of  Issue  and  Redemption  shall 
be  committed  all  functions  of  the  Treasury  Department  per- 
taining to  the  issue  and  redemption  of  notes  and  certificates, 
and  to  the  exchange  of  coins,  and  the  said  Division  of  Issue  and 
Redemption  shall  have  the  custody  of  the  Bank  Note  Guaranty 
Fund  and  of  the  Redemption  Funds  of  the  national  banking 
associations,  and  shall  conduct  the  operations  of  redeeming 
the  circulating  notes  of  national  banking  associations,  as  pre- 
scribed by  law 

Sect.  6.  That  a  reserve  shall  be  established  in  the  Division 
of  Issue  and  Redemption  aforesaid,  by  the  transfer  to  it  by 
the  Treasurer  of  the  United  States  from  the  general  funds  of 
the  Treasury  of  an  amount  of  gold,  in  coin  and  bullion,  equal 
to  25  per  centum  of  the  amount  of  both  United  States  notes 
and  Treasury  notes  issued  under  the  Act  of  July  14,  1890, 
outstanding,  and  a  further  sum  in  gold  equal  to  5  per  centum 
of  the  aggregate  amount  of  the  coinage  of  silver  dollars.  .  .  . 

Sect.  7.  That  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury  to  maintain  the  gold  reserve  in  the  Division  of  Issue 
and  Redemption  aforesaid  at  such  sum  as  shall  secure  the 
certain  and  immediate  redemption  of  all  notes  and  exchange 
of  all  silver  dollars  presented,  as  hereinafter  provided  for,  and 
the  preservation  of  public  confidence;  and  for  this  purpose  he 
shall  from  time  to  time  transfer  to  the  Division  of  Issue  and 
Redemption  any  funds  in  the  Treasury  not  otherwise  appro- 
priated, and  in  addition  thereto  he  is  hereby  authorized  to 
issue  and  sell,  whenever  it  is  in  his  judgment  necessary  to  the 
ends  aforesaid,  bonds  of  the  United  States,  bearing  interest  at 


304  APPENDIX 

a  rate  not  exceeding  3  per  centum  per  annum  payable  in  gold 
coin  at  the  end  of  twenty  years,  but  redeemable  in  gold  coin 
at  the  option  of  the  United  States  after  one  year;  and  the  pro- 
ceeds of  all  such  sales  shall  be  paid  into  the  Division  of  Issue 
and  Redemption  for  the  purposes  aforesaid. 

Sect.  i6.  That,  to  provide  for  any  temporary  deficiency 
which  may  at  any  time  exist  in  the  Treasury  of  the  United 
States,  the  Secretary  of  the  Treasury  be  and  he  is  hereby 
authorized,  at  his  discretion,  to  issue  certificates  of  indebted- 
ness of  the  United  States 

Sect.  18.  That  any  national  banking  association  organized 
under  the  laws  of  the  United  States  shall,  if  its  capital  be 
wholly  paid  up  and  unimpaired,  be  entitled  to  receive  from 
the  Comptroller  of  the  Currency  circulating  notes  of  denomi- 
nations hereinafter  provided,  in  blank,  registered  and  counter- 
signed as  provided  by  law,  to  an  amount  not  exceeding  the 
amount  of  such  paid-up  and  unimpaired  capital,  after  deduct- 
ing therefrom  its  investment  in  real  estate:  Provided,  That 
during  the  five  years  first  succeeding  the  passage  of  this  Act, 
any  national  banking  association  receiving  from  the  Comp- 
troller of  the  Currency  circulating  notes  in  blank  under  the 
provisions  of  this  Act,  shall  maintain  on  deposit  •m.th.  the 
Treasurer  of  the  United  States,  bonds  of  the  United  States 
to  an  amount,  at  a  valuation  computed  as  hereinafter  pre- 
scribed, equal  to  that  of  the  circulating  notes  so  received,  when- 
ever such  notes  shall  not  exceed  25  per  centum  of  the  capital 
stock.  And  for  each  succeeding  year  after  the  expiration  of 
five  years  from  the  passage  of  this  Act,  the  amount  of  bonds 
required  to  be  deposited  before  issuing  notes  in  excess  of  such 
deposit  shall  be  decreased  by  20  per  centum  of  the  original 
25  per  centum  of  capital  stock  hereinbefore  specified,  and 
from  and  after  the  expiration  of  ten  years  from  the  passage 
of  this  Act  no  such  bond  deposit  shall  be  required.  And  no 
further  deposit  of  bonds  shall  be  required  than  is  herein  pre- 
scribed; and  any  national  banking  association  having  at  any 
time  bonds  of  the  United  States  deposited  with  the  Treasurer 
in  excess  of  the  amount  required  by  law  to  be  at  such  time 


APPENDIX  305 

deposited,  may  withdraw  the  whole  or  any  part  of  such  excess. 
But  nothing  herein  contained  shall  be  construed  to  authorize 
or  permit  the  withdrawal  of  bonds  required  to  be  deposited 
under  the  provision  of  Section  5153  of  the  Revised  Statutes 
of  the  United  States,  as  security  for  the  safe  keeping  and  prompt 
payment  of  public  moneys  deposited  with  any  national  bank- 
ing association. 

Sect.  20.  That  every  national  banking  association  shall  at 
all  times  keep  and  have  on  deposit  with  the  Division  of  Issue 
and  Redemption  for  the  purpose  hereinafter  specified  a  sum 
in  gold  coin  equal  to  5  per  centum  of  its  outstanding  circula- 
tion. The  amounts  so  kept  on  deposit  shall  constitute  a  fund 
to  be  known  as  "The  Bank  Note  Guaranty  Fund,"  which 
fund  shall  be  held  for  the  following  purpose,  and  for  no  other, 
namely :  — 

Whenever  the  Comptroller  of  the  Currency  shall  have  be- 
come satisfied  ....  that  any  association  has  refused  to  pay 
its  circulating  notes  on  demand  in  lawful  money,  he  shall 
direct  the  redemption  of  such  notes  from  the  Bank  Note 
Guaranty  Fund  aforesaid,  and  such  notes  shall  thereupon  be  so 
redeemed.  After  the  failure  of  any  national  banking  asso- 
ciation to  redeem  its  notes  shall  have  been  thus  ascertained, 
the  bonds  deposited  with  the  Treasurer  of  the  United  States 
shall  be  sold,  as  provided  by  law,  and  the  proceeds  of  such 
sale  shall  be  paid  into  the  Bank  Note  Guaranty  Fund.  The 
Comptroller  of  the  Currency  shall  forthwith  collect,  for  the 
benefit  of  said  fund  from  the  assets  of  the  bank  and  from  the 
stockholders  thereof,  according  to  their  liability,  as  declared 
by  this  Act,  such  sum  as,  with  the  bank's  balance  in  the  Bank 
Note  Guranty  Fund,  shall  equal  the  amount  of  its  circulating 
notes  outstanding.  And  for  this  purpose  the  United  States 
.shall,  on  behalf  of  the  Bank  Note  Guaranty  Fund,  have  a  para 
mount  lien  upon  all  the  assets  of  the  association;  and  such  fund 
shall  be  made  good  out  of  such  assets  in  preference  to  any 
and  all  other  claims  whatsoever,  except  the  necessary  costs 
and  expenses  of  administering  the  same. 

Sect.  21.   That  whenever  the  Comptroller  of  the  Currency 


306  APPENDIX 

shall  ascertain  what  deficiency,  if  any,  exists  between  the 
aggregate  collections  for  the  benefit  of  the  Bank  Note  Guaranty 
Fund  in  the  case  of  any  failed  bank  and  the  amount  of  its  out- 
standing notes  redeemed  and  to  be  redeemed  from  the  said 
fund,  he  shall  assess  such  deficiency  upon  all  the  national 
banks  in  proportion  to  their  notes  outstanding  at  the  time  of 
the  failure  of  such  bank. 

Sect.  25.  That  every  national  banking  association  shall 
pay,  on  or  before  the  last  day  of  every  month,  to  the  Division 
of  Issue  and  Redemption,  a  duty  imposed  at  the  rate  of  2  per 
centum  per  annum  upon  the  average  daily  amount  of  its 
circulating  notes  outstanding  in  excess  of  60  per  centum  of  its 
capital  stock,  and  not  in  excess  of  80  per  centum  of  such  capi- 
tal stock,  and  a  duty  imposed  at  the  rate  of  6  per  centum  per 
annum  upon  the  average  daily  amount  of  such  notes  out- 
standing in  excess  of  80  per  centum  of  its  capital  stock. 

Sect.  30.  That  no  national  banking  association  shall  count 
or  report  any  of  its  own  notes  as  a  part  of  its  cash  or  cash 
assets. 

McCLEARY  BILL 

May  II,  1898 
Be  it  enacted,  etc. :  .  .  .  . 

That  there  is  hereby  created  a  division  in  the  Treasury  De- 
partment to  be  known  as  the  Division  of  Issue  and  Redemp- 
tion. 

There  is  hereby  created  a  board  consisting  of  three  members, 
to  be  known  as  the  Comptrollers  of  the  Currency.  The  said 
board  shall  have  the  management  of  the  Division  of  Issue  and 
Redemption,  and  shall  take  the  place  of  the  Comptroller  of 
the  Currency 

Sect.  2.  That  to  the  Division  of  Issue  and  Redemption 
shall  be  committed  all  functions  of  the  Treasury  Department 
pertaining  to  the  issue  and  redemption  of  notes  and  certifi- 
cates, and  to  the  exchange  of  coins;  and  in  the  said  Division 
of  Issue  and  Redemption  shall  be  held  the  guaranty  fund  and 


APPENDIX  307 

the  redemption  fund  of  the  national  banking  associations,  and 
through  it  shall  be  conducted  the  operations  of  redeeming  the 
circulating  notes  of  national  banking  associations,  as  pre- 
scribed by  law 

Sect.  3.  That  a  reserve  shall  be  established  in  the  Division 
of  Issue  and  Redemption  aforesaid  by  the  transfer  to  it  by  the 
Treasurer  of  the  United  States  from  the  general  funds  of  the 
Treasurer  of  an  amount  of  gold,  in  coin  and  bullion,  equal  to 
25  per  cent  of  the  amount,  both  of  United  States  notes  and 
Treasury  notes  issued  under  the  Act  of  July  14,  1890,  outstand- 
ing, and  a  further  sum  in  gold  equal  to  5  per  cent  of  the  aggre- 
gate amount  of  the  coinage  of  silver  dollars 

Sect.  4.  That  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury  to  maintain  the  gold  reserve  in  the  Division  of  Issue 
and  Redemption  aforesaid  at  such  sum  as  shall  secure  the 
certain  and  immediate  redemption  of  all  notes  and  exchange 
of  all  silver  dollars  presented,  as  hereinafter  provided  for; 
and  for  this  purpose  he  may,  from  time  to  time,  transfer  to  the 
Division  of  Issue  and  Redemption  any  funds  in  the  Treasury 
not  otherwise  appropriated,  in  excess  of  an  actual  cash  balance 
of  $50,000,000;  and  in  addition  thereto  he  is  authorized  to 
issue  and  sell,  for  gold,  whenever  it  is  in  his  judgment  necessary 
to  the  ends  aforesaid,  and  for  no  other  purpose,  certificates  of 
indebtedness  of  the  United  States  bearing  interest  at  a  rate  not 
exceeding  3  per  cent  per  annum,  payable  in  gold  coin  at  the 
end  of  five  years,  but  redeemable  in  gold  coin  at  the  option  of 
the  United  States  after  one  year,  and  the  proceeds  of  all  such 
sales  shall  be  paid  into  the  Division  of  Issue  and  Redemption 
for  the  purpose  aforesaid. 

Sect.  12.  That  the  circulating  notes  provided  for  in  this 
Act  shall  consist  of  three  classes,  namely,  national  reserve  notes, 
national  bank  notes  and  national  currency  notes. 

The  words  "national  reserve  notes,"  when  used  in  this  Act, 
shall  be  understood  to  mean  notes  issued  to  a  national  bank- 
ing association  in  exchange  for  United  States  notes,  and  for 
whose  current  redemption  in  gold  coin  the  banking  association 
receiving  the  same  shall  be  made  immediately  liable,  and  whose 


f?08  APPENDIX 

ultimate  payment  shall  be  made  by  the  Government  of  the 
United  States. 

That  the  words  "national  bank  notes,"  when  used  in  this 
Act,  shall  mean  circulating  notes  issued  by  national  banking 
associations,  and  secured  by  deposits  of  United  States  bonds. 

That  the  words  "national  currency  notes,"  when  used  in 
this  Act,  shall  be  understood  to  mean  circulating  notes  issued 
by  a  national  banking  association,  and  constituting  a  direct 
and  ultimate  liability  of  the  said  banking  association  as  pro- 
vided in  this  Act. 

Sect.  13.  That  any  national  banking  association,  on  com- 
plying with  the  provisions  of  this  Act,  shall,  if  its  capital  be 
wholly  paid  up  and  unimpaired,  be  entitled  to  receive  from  the 
Comptrollers  of  the  Currency  national  bank  notes  or  national 
currency  notes,  or  both,  of  the  different  denominations  here- 
inafter specified  (none,  however,  being  less  than  $10)  in  blank, 
registered  and  countersigned  as  provided  by  law,  to  the  amounts 
and  in  the  manner  following,  and  on  the  following  terms  arfd 
conditions,  but  in  no  case  exceeding  in  the  sum  of  their  bank 
notes  and  currency  notes'^  the  amount  of  such  paid-up  and  un- 
impaired capital. 

Subdivision  A .  That  any  national  banking  association  may 
deposit  with  the  Treasurer  of  the  United  States  under  such 
regulations  as  the  Secretary  of  the  Treasury  may  approve. 
United  State  notes  to  an  amount  not  exceeding  its  paid-up  and 
unimpaired  capital,  and  shall  then  be  entitled  to  receive  in 
exchange  therefor  from  the  Comptrollers  of  the  Currency  an 
equal  amount  of  National  Reserve  notes,  of  the  kind  and  de- 
nominations described  in  Sections  12  and  15  of  this  Act. 

United  States  notes  received  into  the  Division  of  Issue  and 
Redemption  in  exchange  for  national  reserve  notes  shall  be 
cancelled  as  received. 

Subdivision  B.  That  upon  the  deposit  by  any  national 
banking  association  of  United  States  bonds,  ....  it  shall 
be  entitled  to  receive  from  the  Comptrollers  of  the  Currency 

*The  insertion  of  the  words  in  italics  is  recommended  in  the  report. 


APPENDIX  309 

national  bank  notes  of  different  denominations  in  blank,  as 
provided  by  this  Act,  equal  in  amount  to  the  par  value  of  the 
bonds  so  deposited 

Subdivision  C.  That  any  national  banking  association, 
having  deposited  with  the  Treasurer  of  the  United  States, 
United  States  notes  and  received  in  exchange  therefor  national 
reserve  notes,  shall  be  entitled  to  receive  and  issue,  in  addition 
thereto,  an  amount  of  national  currency  notes  equal  to  the 
amount  of  national  reserve  notes  received  as  aforesaid:  Pro- 
vided, however,  that  the  amount  of  national  currency  notes  thus 
issued  shall  not  exceed  the  amount  of  its  national  bank  notes 
outstanding;  And  provided  further,  That  the  notes  thus  issued 
shall  not  exceed  40  per  cent  of  the  paid-up  and  unimpaired 
capital  of  the  bank,  but  an  additional  amount  of  the  national 
currency  notes  may  be  issued. 

Sect.  23.  That  every  national  banking  association  shall 
at  all  times  keep  and  have  on  deposit  with  the  Division  of 
Issue  and  Redemption  for  the  purpose  hereinafter  specified, 
a  sum  in  gold  coin  equal  to  5  per  cent  of  the  outstanding  cir- 
culation of  national  currency  notes.  The  amount  so  kept  on 
deposit  shall  constitute  a  fund  to  be  known  as  the  "guaranty 
fund,"  which  fund  shall  be  held  for  the  following  purpose,  and 
for  no  other,  namely: 

Whenever  the  Comptrollers  of  the  Currency  shall  have  be- 
come satisfied  that  any  association  has  refused  to  pay  any  of 
its  circulating  notes  on  demand,  they  shall  direct  the  redemp- 
tion of  its  national  currency  notes  from  the  guaranty  fund 
aforesaid,  and  the  redemption  in  gold  coin  of  the  United  States 
from  the  reserve  fund  in  the  Division  of  Issue  and  Redemption 
of  the  national  reserve  notes  issued  to  it.  After  the  failure  of 
any  national  banking  association  to  redeem  any  of  said  notes 
shall  have  been  thus  ascertained  the  bonds  deposited  by  it  with 
the  Treasurer  of  the  United  States  shall  be  sold  as  provided 
by  law,  and  the  proceeds  of  such  sale  shall  be  applied  first  to 
the  redemption  of  the  notes  for  which  they  are  held  and  the 
balance,  if  any,  shall  be  paid  into  the  guaranty  fund,  so  far  as 


310  APPENDIX 

may  be  necessary  to  provide  for  the  final  redemption  of  any 
other  outstanding  notes  of  such  bank. 

The  Comptrollers  of  the  Currency  shall  forthwith  collect, 
for  the  benefit  of  said  guaranty  fund,  from  the  assets  of  the 
bank  and  from  the  stockholders  thereof,  according  to  their 
liability  as  declared  by  this  act,  such  sum  as,  with  the  bank 
balance  in  the  guaranty  fund  as  aforesaid,  shall  equal  the 
amount  of  its  national  currency  notes  outstanding.  And  for 
this  purpose  the  United  States  shall,  on  behalf  of  the  guaranty 
fund,  have  a  paramount  lien  upon  all  the  assets  of  the  asso- 
ciation; and  such  fund  shall  be  made  good  out  of  such  assets 
in  preference  to  any  and  all  other  claims  whatsoever,  except 
the  necessary  cost  and  expenses  of  administering  the  same. 

Sect.  27.  That  the  fund  of  5  per  cent  of  outstanding  national 
bank  notes  required  to  be  kept  on  deposit  by  every  national 
banking  association  for  the  current  redemption  of  the  circu- 
lating notes  of  such  association  shall  be  required  to  be  equal 
to  5  per  cent  of  the  national  reserve  notes  issued  to  it  and  of 
its  national  bank  notes  outstanding,  and  shall  be  in  gold  coin 
of  the  United  States ;  and  the  Comptroller  of  the  Currency  shall 
have  authority  to  provide  for  the  redemption  of  said  national 
bank  notes  and  national  reserve  notes  at  any  or  all  of  the  sub- 
treasuries  of  the  United  States.  Said  note  shall  be  paid  in 
gold  coin  of  the  United  States,  and  shall  thereupon  be  returned 
to  the  banks  to  which  they  were  originally  issued. 

Sect.  30.  That  when  the  amount  of  the  National  Currency 
notes  of  any  national  banking  association  issued  under  this 
Act  shall,  together  with  its  national  banking  notes  outstanding, 
exceed  80  per  cent  of  its  capital,  every  such  national  banking 
association  shall  pay,  on  or  before  the  last  day  of  every  month, 
to  the  Division  of  Issue  and  Redemption  a  tax  imposed  at  the 
rate  of  one-half  of  i  per  cent  per  month  upon  the  average  daily 
amount  of  said  National  Currency  notes  in  circulation  in  excess 
of  80  per  cent  of  its  capital  stock,  and  which  shall  not  have 
been  returned  to  the  comptrollers  for  cancellation  or  covered 
by  an  equal  amount  of  gold  coin  deposited  with  the  first  comp- 
troller for  the  retirement  of  such  notes. 


APPENDIX  311 

Sect.  35.  That  it  shall  be  lawful  for  any  national  banking 
association  to  establish  branches  under  such  rules  and  regu- 
lations as  may  be  prescribed  by  the  Comptrollers  of  the  Cur- 
rency. 

ALDRICH  BILL 

December  19,  1899 
Be  it  enacted,  etc. : 

That  the  dollar  consisting  of  twenty-five  and  eight-tenths 
grains  gold,  nine-tenths  fine,  shall,  as  established  by  Section 
351 1  of  the  Revised  Statutes  of  the  United  States,  continue 
to  be  the  standard  unit  of  value,  and  all  forms  of  money  issued 
or  coined  by  the  United  States  shall  be  maintained  at  a  parity 
of  value  with  this  standard;  and  United  States  notes,  and 
Treasury  notes  issued  under  the  Act  of  July  14,  1890,  when 
presented  to  the  Treasury  for  redemption  shall  be  redeemed 
in  gold  coin  of  such  standard. 

Sect.  2.  That  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury,  in  order  to  secure  the  prompt  and  certain  redemp- 
tion of  United  States  and  Treasury  notes  as  hereinbefore  pro- 
vided, to  set  apart  in  the  Treasury  a  reserve  fund  of  $150,000,- 
000  in  gold  coin,  which  fund  shall  be  used  for  such  redemption 
purposes  only,  and  whenever  and  as  often  as  any  of  said  notes 
shall  be  redeemed  from  said  fund  it  shall  be  the  duty  of  the 
Secretary  of  the  Treasury  to  use  said  notes  so  redeemed  to 
restore  and  maintain  such  reserve  fund,  in  the  manner  follow- 
ing, to  wit:  First,  by  exchanging  the  notes  so  redeemed  for 
any  gold  coin  in  the  general  fund  of  the  Treasury;  second,  by 
accepting  deposits  of  gold  coin  at  the  Treasury  or  at  any  sub- 
treasury  in  exchange  for  the  United  States  notes  so  redeemed; 
third,  by  procuring  gold  coin  by  the  use  of  said  notes,  in  ac- 
cordance with  the  provisions  of  section  thirty-seven  hundred 
of  the  Revised  Statutes  of  the  United  States.  If  the  Secretary 
of  the  Treasury  is  unable  to  restore  and  maintain  the  gold 
coin  in  the  reserve  fund  by  the  foregoing  methods,  and  the 
amount  of  such  gold  coin  in   said  fund  shall  at  any  time  fall 


312  APPENDIX 

below  $100,000,000,  then  it  shall  be  his  duty  to  restore  and 
maintain  the  same  by  borrowing  money  on  the  credit  of  the 
United  States. 

Sect.  7.  That  upon  deposit  with  the  Treasurer  of  the 
United  States,  by  any  national  banking  association,  of  any 
bonds  of  the  United  States  in  the  manner  provided  by  exist- 
ing law,  such  association  shall  be  entitled  to  receive  from  the 
Comptroller  of  the  Currency  circulating  notes  in  blank, 
registered  and  countersigned  as  provided  by  law,  equal  in 
amount  to  the  par  value  of  the  bonds  so  deposited;  and  any 
national  banking  association  now  having  bonds  on  deposit 
for  the  security  of  circulating  notes,  and  upon  which  an  amount 
of  circulating  notes  has  been  issued  less  than  the  par  value  of 
the  bonds,  shall  be  entitled,  upon  due  application  to  the 
Comptroller  of  the  Currency,  to  receive  additional  circulating 
notes  in  blank  to  an  amount  which  will  increase  the  circulating 
notes  held  by  such  association  to  the  par  value  of  the  bonds 
deposited,  such  additional  notes  to  be  held  and  treated  in  the 
same  way  as  circulating  notes  of  national  banking  associa- 
tions heretofore  issued,  and  subject  to  all  the  provisions  of 
existing  law  affecting  such  notes 


SECRETARY  GAGE'S  BILL 

Be  it  enacted^  etc. : 

That  there  be  established  in  the  Treasury  Department, 
as  a  part  of  the  office  of  the  Treasurer  of  the  United  States,  a 
division  to  be  designated  and  known  as  the  Division  of  Issue 
and  Redemption,  to  which  shall  be  assigned,  under  such 
regulations  as  the  Secretary  of  the  Treasury  may  approve,  all 
records  and  accounts  relating  to  the  issue,  redemption  and 
exchange  as  hereinafter  provided  of  the  several  classes  of 
United  States  paper  money. 

There  shall  be  transferred  from  the  general  fund  in  the 
Treasury  of  the  United  States  and  taken  up  on  the  books  of 
said  division  as  a  redemption  fund  the  sum  of  $125,000,000,  in 


APPENDIX  313 

United  States  gold  coin  and  bullion,  and  such  further  sums 
of  standard  silver  dollars  and  silver  bullion,  purchased  under 
the  Act  of  Congress  approved  July  14,  1890,  as  shall  equal 
the  silver  certificates  outside  the  Treasury  and  Treasury  notes 
of  1890  outstanding  on  the  date  w^hen  this  Act  shall  take  effect; 
and  thereafter  the  gold  and  silver  coins  and  bullion  hereby 
transferred  from  the  general  fund  in  the  Treasury  as  herein 
provided  shall  be  increased  or  diminished,  as  the  case  maybe,  in 
accordance  with  the  provisions  of  this  Act,  and  in  no  other  way. 

Sect.  2.  That  all  United  States  notes.  Treasury  notes  of 
1890  and  silver  certificates  presented  for  redemption  shall  be 
redeemed  from  the  redemption  fund  herein  provided,  in  ac- 
cordance with  the  terms  of  existing  law;  but  the  notes  and 
certificates  so  redeemed  shall  be  held  in  and  constitute  a  part 
of  said  fund,  and  shall  not  be  withdrawn  from  said  fund  nor 
disbursed,  except  in  exchange  for  an  equivalent  amount  of  the 
coin  in  which  said  notes  or  certificates  were  redeemed;  but  to 
enable  the  Secretary  of  the  Treasury  more  thoroughly  to 
carry  out  the  provisions  contained  in  this  act,  he  is  hereby 
authorized  to  exchange  any  of  the  funds  in  the  Division  of 
Issue  and  Redemption  for  any  other  funds  which  may  be  in 
the  general  fund  of  the  Treasury  Department. 

Sect.  5.  That  any  national  banking  association  whose 
deposit  of  bonds  is  less  than  the  amount  of  its  capital  may 
deposit  with  the  Treasurer  of  the  United  States,  under  such 
regulations  as  the  Secretary  of  the  Treasury  may  approve, 
United  States  notes.  Treasury  notes  of  1890,  and  silver  certifi- 
cates, and  shall  be  entitled  to  receive  from  the  Comptroller 
of  the  Currency  and  to  issue  an  equal  amount  of  its  circulating 
notes;  but  the  aggregate  amount  of  bonds.  United  States  notes, 
Treasury  notes  of  1890  and  silver  certificates  deposited  by  any 
national  banking  association  shall  not  exceed  the  amount  of  its 
capital: 

Provided,  That  the  total  amount  of  United  States  notes. 
Treasury  notes  of  1890  and  silver  certificates  deposited  with 
the  Treasurer  of  the  United  States  under  authority  of  this 
section  shall  not  exceed  the  sum  of  $200,000,000. 


314  APPENDIX 

Sect.  6.  That  the  Secretary  of  the  Treasury  shall  issue, 
from  time  to  time,  in  his  discretion,  bonds  of  the  same  character 
and  class  as  those  described  in  the  third  section  of  this  act, 
and  shall  substitute  the  same  with  the  Treasurer  of  the  United 
States  for  equal  amounts  of  the  United  States  notes,  Treasury 
notes  of  1890  and  silver  certificates  deposited  by  national 
banking  associations,  and  the  bonds  so  issued  and  substituted 
shall  be  charged  to  the  respective  national  banking  associations, 
and  be  accounted  for  by  them  at  such  prices,  not  less  than  par, 
as  shall  represent  the  market  value  of  such  bonds;  and  the 
United  States  notes,  Treasury  notes  of  1890  and  silver  cer- 
tificates released  as  herein  provided  shall  become  a  part  of 
the  general  redemption  fund ;  and  the  Secretary  of  the  Treasury 
is  hereby  authorized  to  exchange  any  of  said  Treasury  notes 
of  1890  and  said  silver  certificates  for  a  like  amount  of  United 
States  notes; 

Provided,  That  the  amount  of  bonds  issued  under  the  author- 
ity of  this  section  shall  not  exceed  the  sum  of  $200,000,000. 

Sect.  7.  When  any  national  bank  now  e.xisting  or  here- 
after organized  shall  have  deposited  such  United  States  bonds, 
United  States  notes.  Treasury  notes  of  1890  or  silver  certifi- 
cates, to  an  amount  of  not  less  than  50  per  centum  of  its  capital, 
it  shall  be  entitled  to  receive  from  the  Comptroller  of  the  Cur- 
rency, and  to  issue,  national  bank  notes,  in  addition  to  the 
50  per  centum  thus  provided,  to  the  amount  of  25  per  centum 
of  such  deposits;  but  the  circulation  issued  by  any  national 
banking  association  shall  never  be  in  excess  of  its  paid-up 
capital  stock,  and  the  additional  notes  so  issued  shall  not  be 
secured  by  said  deposit,  but  shall  constitute  a  first  lien  upon 
all  the  remaining  assets  of  the  association  issuing  such  notes. 
Upon  the  failure  of  any  association  to  redeem  its  circulating 
notes  above  provided,  whether  the  same  are  issued  against 
deposited  security  or  against  general  assets,  the  same  shall  be 
promptly  redeemed  by  the  Treasurer  of  the  United  States. 
To  secure  the  United  States  against  any  loss  arising  from  its 
guarantee  to  pay  and  redeem  such  additional  circulating  notes, 
it  shall  be  the  duty  of  the  Comptroller  of  the  Currency  to  levy 


APPENDIX  31o 

upon  and  collect  from  every  national  banking  association 
issuing  such  unsecured  circulation  a  tax  at  the  rate  of  2  per 
centum  per  annum  on  such  unsecured  circulation;  which  said 
tax  of  2  per  centum  per  annum  shall  be  paid  to  the  Treasurer 
of  the  United  States  in  equal  semi-annual  payments  in  January 
and  July  of  each  year,  and  when  so  collected  it  shall  constitute 
a  safety  fund  out  of  which  the  United  States  shall  be  reimbursed 
for  any  redemption  of  said  unsecured  circulation  it  may  make 
as  herein  provided.  The  safety  fund  thus  created  shall  be 
invested  by  the  Secretary  of  the  Treasury  in  such  Govern- 
ment bonds  as  he  may  consider  advisable.  Said  tax  of  2  per 
centum  per  annum  shall  be  in  addition  to  the  tax  of  one-half 
of  I  per  centum  per  annum  on  circulating  notes  hereinafter 
authorized. 

Sect.  8.  That  each  national  banking  association  shall 
deposit  and  maintain  in  the  Treasury  of  the  United  States  a 
sum  of  lawful  money  equal  to  10  per  centum  of  its  aggregate 
circulation,  said  sum  to  be  in  lieu  of  the  5  per  centum  redemp- 
tion fund  now  required  by  Sect.  3  of  the  Act  approved  June 
20,  1874,  to  be  maintained,  and  to  be  subject  to  all  the  pro- 
visions of  existing  law  respecting  said  redemption  fund  not 
inconsistent  with  the  provisions  of  this  Act;  and,  in  considera- 
tion of  the  deposits  of  bonds.  United  States  notes,  Treasury 
notes  of  i8go  and  silver  certificates,  and  the  tax  of  2  per  cen- 
tum on  the  unsecured  circulating  notes  of  national  banking 
associations,  and  of  the  deposit  of  lawful  money  provided  in 
this  section,  the  faith  of  the  United  States  is  hereby  pledged  to 
the  redemption  in  lawful  money  of  the  United  States  of  all 
the  circulating  notes  of  said  national  banking  associations. 


316  APPENDIX 

GOLD  STANDARD  ACT 

March  14,  1900 

an  act  to  define  and  fix  the  standard  of  value,  to 
maintain  the  parity  of  all  forms  of  money  issued 
or  coined  by  the  united  states,  to  refund  the 
public  debt,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  America  in  Congress  Assembled: 

That  the  dollar  consisting  of  twenty-five  and  eight-tenths 
grains  of  gold,  nine-tenths  fine,  as  established  by  Section  351 1 
of  the  Revised  Statutes  of  the  United  States,  shall  be  the 
standard  unit  of  value,  and  all  forms  of  money  issued  or  coined 
by  the  United  States  shall  be  maintained  at  a  parity  of  value 
v^rith  the  standard,  and  it  shall  be  the  duty  of  the  Secretary  of 
the  Treasury  to  maintain  such  parity. 

Sect.  2.  That  United  States  notes,  and  Treasury  notes 
issued  under  the  Act  of  July  14,  1890,  v^hen  presented  to  the 
Treasury  for  redemption,  shall  be  redeemed  in  gold  coin  of 
the  standard  fixed  in  the  first  section  of  this  Act,  and  in  order 
to  secure  the  prompt  and  certain  redemption  of  such  notes  as 
herein  provided  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury  to  set  apart  in  the  Treasury  a  reserve  fund  of  $150,- 
000,000  in  gold  coin  and  bullion,  which  fund  shall  be  used  for 
such  redemption  purposes  only,  and  whenever  and  as  often  as 
any  of  said  notes  shall  be  redeemed  from  said  fund  it  shall  be 
the  duty  of  the  Secretary  of  the  Treasury  to  use  said  notes  so 
redeemed  to  restore  and  maintain  such  reserve  fund  in  the 
manner  following,  to  wit:  First,  by  exchanging  the  notes  so 
redeemed  for  any  gold  coin  in  the  general  fund  of  the  Treasury; 
second,  by  accepting  deposits  of  gold  coin  at  the  Treasury  or 
at  any  sub-treasury  in  exchange  for  the  United  States  notes  so 
redeemed;  third,  by  procuring  gold  coin  by  the  use  of  said 
notes,  in  accordance  with  the  provisions  of  Sect.  3700  of  the 
Revised  Statutes  of  the  United  States.     If  the  Secretary  is  un- 


APPENDIX  317 

able  to  restore  and  maintain  the  gold  coin  in  the  reserve  fund 
by  the  foregoing  methods,  and  the  amount  of  such  gold  coin 
and  bullion  in  said  fund  shall  at  any  time  fall  below  $100,000,- 
000,  then  it  shall  be  his  duty  to  restore  the  same  to  the  maximum 
sum  of  $150,000,000  by  borrowing  money  on  the  credit  of  the 
United  States  ....  and  the  gold  coin  received  from  the  sale 
of  said  bonds  shall  first  be  covered  into  the  general  fund  of  the 
Treasury  and  then  exchanged,  in  the  manner  hereinbefore 
provided,  for  an  equal  amount  of  the  notes  redeemed  and  held 
for  exchange,  and  the  Secretary  of  the  Treasury  may,  in  his 
discretion,  use  said  notes  in  exchange  for  gold,  or  to  purchase 
or  redeem  any  bonds  of  the  United  States,  or  for  any  other 
lawful  purpose  the  public  interests  may  require,  except  that 
they  shall  not  be  used  to  meet  deficiencies  in  the  current 
revenues.  That  United  States  notes  when  redeemed,  in  ac- 
cordance with  the  provisions  of  this  section,  shall  be  reissued, 
but  shall  be  held  in  the  reserve  fund  until  exchanged  for  gold 
as  herein  provided;  and  the  gold  coin  and  buUion  in  the  reserve 
fund,  together  with  the  redeemed  notes  held  for  use  as  pro- 
vided in  this  section,  shall  at  no  time  exceed  the  maximum  sum 
of  $150,000,000. 

Sect.  4.  That  there  be  established  in  the  Treasury  Depart- 
ment, as  a  part  of  the  ofSce  of  the  Treasurer  of  the  United 
States,  divisions  to  be  designated  and  known  as  the  Division 
of  Issue  and  the  Division  of  Redemption,  to  which  shall  be 
assigned  respectively,  under  such  regulations  as  the  Secretary 
of  the  Treasury  may  approve,  all  records  and  accounts  re- 
lating to  the  issue  and  redemption  of  the  United  States  notes, 
gold  certificates,  silver  certificates,  and  currency  certificates. 
There  shall  be  transferred  from  the  accounts  of  the  general 
fund  of  the  Treasury  of  the  United  States,  and  taken  up  on 
the  books  of  said  divisions  respectively,  accounts  relating  to 
the  reserve  fund  for  the  redemption  of  the  United  States  notes 
and  Treasury  notes,  the  gold  coin  held  against  outstanding  gold 
certificates,  the  United  States  notes  held  against  outstanding 
currency  certificates,  and  the  silver  dollars  held  against  out- 
standing silver  certificates,  and  each  of  the  funds  represented 


318  APPENDIX 

by  these  accounts  shall  be  used  for  the  redemption  of  the  notes 
and  certificates  for  which  they  are  respectively  pledged,  and 
shall  be  used  for  no  other  purpose,  the  same  being  held  as 
trust  funds. 

Sect.  io.  That  Sect.  5138  of  the  Revised  Statutes  is  hereby 
amended  so  as  to  read  as  follows: 

"Sect.  5138.  No  association  shall  be  organized  with  a 
less  capital  than  $100,000  except  that  banks  with  a  capital 
of  not  less  than  $50,000  may,  with  the  approval  of  the 
Secretary  of  the  Treasury,  be  organized  in  any  place  the 
population  of  which  does  not  exceed  6,000  inhabitants, 
and  except  that  banks  with  a  capital  of  not  less  than 
$25,000  may,  with  the  sanction  of  the  Secretary  of  the 
Treasury,  be  organized  in  any  place  the  population  of 
which  does  not  exceed  3,000  inhabitants.  No  associa- 
tion shall  be  organized  in  a  city  the  population  of  which 
exceeds  50,000  persons  with  a  capital  of  less  than  $200,000." 

Sect.  n.  That  the  Secretary  of  the  Treasury  is  hereby 
authorized  to  receive  at  the  Treasury  any  of  the  outstanding 
bonds  of  the  United  States  ....  and  to  issue  in  exchange 
therefor  an  equal  amount  of  coupon  or  registered  bonds  of 
the  United  States  in  such  form  as  he  may  prescribe,  in  de- 
nominations of  $50  or  any  multiple  thereof,  bearing  interest 
at  the  rate  of  2  per  cent  per  annum,  payable  quarterly 

Sect.  12.  That  upon  the  deposit  with  the  Treasurer  of  the 
United  States  by  any  national  banking  association,  of  any 
bonds  of  the  United  States  in  the  manner  provided  by  existing 
law,  such  association  shall  be  entitled  to  receive  from  the 
Comptroller  of  the  Currency  circulating  notes  in  blank, 
registered  and  countersigned  as  provided  by  law,  equal  in 
amount  to  the  par  value  of  bonds  so  deposited;  ....  pro- 
vided, That  the  total  amount  of  such  notes  issued  to  any  such 
association  may  equal  at  any  time  but  shall  not  exceed  the 
amount  at  such  time  of  its  capital  stock  actually  paid  in 


APPENDIX  319 

FOWLER  BILL 

April  4,  1902 
Be  it  enacted,  etc.:  .  .  .  . 

That  there  shall  be,  and  is  hereby,  created  and  established 
in  the  Treasury  Department  a  Division  of  Banking  and  Cur- 
rency, which  shall  be  in  charge  of  a  board  consisting  of  three 
members 

Sect.  2.  That  if  any  national  bank  shall  assume  the  cur- 
rent redemption,  as  hereinafter  described,  of  an  amount  of 
United  States  notes  equal  to  20  per  centum  of  its  paid-up 
capital,  it  shall  have  the  right,  without  depositing  United  States 
bonds  as  now  provided  by  law  — 

First  —  To  immediately  take  out  for  issue  and  circulate  an 
amount  of  bank  notes  equal  to  10  per  centum  of  its  paid-up 
capital,  by  paying  a  tax,  on  the  first  days  of  January  and  July 
of  each  year,  of  one-eighth  of  i  per  centum  upon  the  average 
amount  of  such  notes  in  actual  circulation  during  the  pre- 
ceding six  months. 

Second  —  To  take  out  for  issue  and  circulate  an  amount  of 
bank  notes  equal  to  10  per  centum  of  its  paid  up-capital  at  any 
time  after  the  expiration  of  one  year  from  the  date  of  the 
assumption  aforesaid;  and  it  shall  pay  into  the  Treasury  of 
the  United  States,  on  the  first  days  of  January  and  July  of  each 
year,  a  tax  of  one-eighth  of  i  per  centum  upon  the  average 
amount  of  such  notes  in  actual  circulation  during  the  preceding 
six  months 

Third  —  To  take  out  for  issue  and  circulate  an  amount  of 
bank  notes  equal  to  10  per  centum  of  its  paid-up  capital  at 
any  time  after  the  expiration  of  two  years  from  the  date  of  the 
assumption  aforesaid ;  and  it  shall  pay  into  the  Treasury  of  the 
United  States,  on  the  first  days  of  January  and  July  of  each 
year,  a  tax  of  five-eighths  of  i  per  centum  upon  the  average 
amount  of  such  notes  in  actual  circulation  during  the  pre- 
ceding six  months. 

Fourth  —  To  take  out  for  issue  and  circulate  an  amount  of 


320  APPENDIX 

bank  notes  equal  to  lo  per  centum  of  its  paid-up  capital  at  any 
time  after  the  expiration  of  three  years  from  the  date  of  the 
assumption  aforesaid;  and  it  shall  pay  into  the  Treasury  of  the 
United  States,  on  the  first  days  of  January  and  July  of  each 
year,  a  tax  of  five-eighths  of  i  per  centum  upon  the  average 
amount  of  such  notes  in  actual  circulation  during  the  pre- 
ceding six  months. 

Fijth  —  To  take  out  for  issue  and  circulate  an  amount  of 
bank  notes  eciual  to  lo  per  centum  of  its  paid-up  capital  at  any 
time  after  the  expiration  of  four  years  from  the  date  of  the 
assumption  aforesaid ;  and  it  shall  pay  into  the  Treasury  of  the 
United  States,  on  the  first  days  of  January  and  July  of  each 
year,  a  tax  of  five-eighths  of  i  per  centum  upon  the  average 
amount  of  such  notes  in  actual  circulation  during  the  pre- 
ceding six  months. 

Sixth  —  To  take  out  for  issue  and  circulate  an  amount  of 
bank  notes  equal  to  lo  per  centum  of  its  paid-up  capital  at 
any  time  after  the  expiration  of  five  years  from  the  date  of  the 
assumption  aforesaid ;  and  it  shall  pay  into  the  Treasury  of  the 
United  States,  on  the  first  days  of  January  and  July  of  each 
year,  a  tax  of  five-eighths  of  i  per  centum  upon  the  average 
amount  of  such  notes  in  actual  circulation  during  the  preceding 
six  months. 

Seventh  —  With  the  approval  of  the  Board  of  Control,  to 
take  out  for  issue  and  circulate  an  amount  of  notes  equal  to 
20  per  centum  of  its  paid-up  capital  at  any  time  after  the 
expiration  of  six  years  from  the  date  of  the  assumption  afore- 
said; but  it  shall  pay  into  the  Treasury  of  the  United  States, 
on  the  first  days  of  January  and  July  of  each  year,  a  tax  of  one 
and  one-half  per  centum  upon  the  average  amount  of  such 
notes  in  actual  circulation  during  the  preceding  six  months. 

Eighth  —  With  the  approval  of  the  Board  of  Control,  to  take 
out  for  issue  and  circulate  an  amount  of  notes  equal  to  20  per 
centum  of  its  paid-up  capital  at  any  time  after  the  expiration 
of  seven  years  from  the  date  of  the  assumption  aforesaid;  but 
it  shall  pay  into  the  Treasury  of  the  United  States,  on  the  first 
days  of  January  and  July  of  each  year,  a  tax  of  two  and  one- 


APPENDIX  321 

half  per  centum  upon  the  average  amount  of  such  notes  in 
actual  circulation  during  the  preceding  six  months. 

The  manner  and  form  of  the  assumption  of  the  current  re- 
demption of  the  United  States  notes,  as  aforesaid,  shall  be  as 
follows:  Each  note  shall  bear  the  endorsement: 

"For  value   received,   the national  bank  of   (city), 

(State),  v^ill  currently  redeem  this  note  in  gold  coin  until  the 
same  has  been  paid  and  canceled  in  accordance  with  the  pro- 
visions of  law."  .... 

Whenever  a  national  bank  shall  present  any  United  States 
notes  at  the  United  States  Treasury  for  indorsement,  as  afore- 
said, it  shall  at  the  same  time  surrender  to  the  United  States 
Treasury  an  additional  amount  of  United  States  notes  equal 
to  one-half  of  the  United  States  notes  presented  for  such  in- 
dorsement and  receive  in  exchange  therefor  gold  coin;  and  the 
United  States  notes  so  redeemed  shall  not  be  reissued,  but  shall 
be  canceled  and  destroyed. 

Sect.  3.  That  when  the  national  banks  of  the  United  States 
shall  have  assumed  the  current  redemption  of  United  States 
notes  amounting  in  the  aggregate  to  $130,000,000,  and  the 
United  States  has  redeemed  and  canceled  United  States  notes 
amounting  to  $65,000,000,  no  national  bank  shall  thereafter 
pay  out  any  United  States  notes  the  current  redemption  of 
which  has  not  been  assumed  by  some  national  bank,  but  shall 
return  the  same  to  the  United  States  Treasury  for  redemption, 
and  the  Secretary  of  the  Treasury  shall  redeem  the  United 
States  notes  so  returned  out  of  the  gold  coin  in  the  issue  and 
redemption  of  the  Treasury,  and  they  shall  not  be  reissued, 
but  shall  be  canceled  and  destroyed.  But  it  shall  be  the  duty 
of  the  Secretary  of  the  Treasury  to  maintain  the  reserve  fund 
at  an  amount  not  less  than  thirty-three  and  one-third  per  cen- 
tum of  the  United  States  notes  at  any  time  outstanding. 

From  and  after  the  first  presentation  for  redemption  and 
cancellation  of  any  United  States  notes  in  accordance  with  the 
provisions  of  this  section,  the  Secretary  of  the  Treasury  shall 
not  pay  out  or  issue  any  gold  certificates. 

Sect.  4.   That  after  the  national  banks  shall  have  assumed 


322  APPENDIX 

the  current  redemption  of  $120,000,000  of  United  States  notes, 
and  the  United  States  shall  have  redeemed,  canceled,  and 
destroyed  $65,000,000  of  United  States  notes,  in  accordance 
with  Section  2  of  this  Act,  any  national  bank  which  has  not 
assumed  the  current  redemption  of  any  United  States  notes  as 
hereinbefore  provided  may  then  take  out  an  amount  of  cir- 
culation equal  to  10  per  centum  of  its  capital,  and  from  year 
to  year  thereafter  additional  amounts  of  circulation  in  accord- 
ance with  the  provisions  of  Section  2  of  this  Act;  but  upon 
the  first  20  per  centum  of  the  total  circulation  to  which  it  is 
entitled  under  this  Act  it  shall  pay  into  the  Treasury  of  the 
United  States,  on  the  first  days  of  January  and  July  of  each 
year,  five-eighths  of  i  per  centum  upon  the  average  amount 
of  such  notes  in  actual  circulation  during  the  preceding  six 
months,  and  upon  all  such  notes  taken  out  for  issue  in  excess 
of  said  20  per  centum  the  taxes  prescribed  in  Section  2  of 
this  Act 

Sect.  6.  That  all  the  bank  notes  taken  out  for  issue  in 
accordance  with  the  provisions  of  this  Act  shall  be  furnished 
by  the  United  States  at  the  expense  of  the  respective  banks 
issuing  them,  and  shall  be  in  denominations  of  ten  dollars  and 
multiples  thereof. 

Sect.  7.  That  such  notes  shall  be  a  first  lien  upon  the  assets 
of  the  respective  banks  issuing  them,  and  shall  be  received  upon 
deposit  and  for  all  purposes  of  debt  or  liability  by  every  national 
bank  at  par  and  without  any  charge  of  whatsoever  kind,  and 
such  notes  shall  be  receivable  for  all  public  dues  except 
duties  on  imports,  and  when  so  received  may  be  paid  out  again. 

Sect.  8.  That  the  total  amount  of  circulating  notes  of  all 
kinds  of  any  national  bank  may  equal,  but  shall  not  at  any 
time  exceed,  the  amount  of  its  paid-up  capital 

Sect.  10.  That  the  Secretary  of  the  Treasury  is  hereby 
authorized,  in  his  discretion,  to  deposit  all  the  money  of  the 
United  States  in  excess  of  $50,000,000,  except  that  in  the  Issue 
and  Redemption  Division  of  the  Treasury,  in  national  banks, 
upon  the  condition  that  said  banks  shall  first  deposit  in 
the   United  States  Treasury  United   States   bonds  equal   in 


APPENDIX  323 

amount  at  par  to  the  sum  to  be  so  deposited;  and  such  banks 
shall,  on  the  first  days  of  January  and  July  of  each  year,  pay 
interest  thereon  to  the  United  States  at  the  rate  of  i  per  centum 
per  annum  upon  the  average  balances  of  the  preceding  six 
months,  but  such  banks  shall  not  be  required  to  hold  any 

reserve  against  such  deposits 

"Any  national  banking  association  may  amend  its  articles  of 
association  with  reference  to  the  places  where  its  banking 
operations  are  to  be  carried  on  upon  the  unanimous  vote  of  its 
board  of  directors  by  and  with  the  approval  of  the  Board  of 
Control  of  Banking  and  Currency:  Provided,  howez^er,  That 
authority  to  establish  branches  in  the  possessions  of  the  United 
States  and  in  foreign  countries  shall  be  given  only  to  banks 
having  a  paid-up  capital  of  not  less  than  $5,000,000." 


PAYNE  BILL 

February  26,  1903 

Be  it  enacted  by  the  Senate  and  House  oj  Representatives  of  the 
United  States  oj  America  in  Congress  assembled: 
"Sect.  5153.  All  national  banking  associations,  designated 
for  that  purpose  by  the  Secretary  of  the  Treasury,  shall  be 
depositories  of  public  money,  under  such  regulations  as  may 
be  prescribed  by  the  Secretary,  and  they  may  also  be  em- 
ployed as  financial  agents  of  the  Government;  and  they  shall 
perform  all  such  reasonable  duties  as  depositories  of  public 
moneys  and  financial  agents  of  the  Government  as  may  be 
required  of  them.  The  Secretary  of  the  Treasury  may  de- 
posit in  such  designated  depositories  public  money  received 
from  all  sources,  and  shall  require  such  depositories  to  give 
satisfactory  security,  as  hereinafter  authorized,  for  the  safe- 
keeping and  prompt  payment  of  the  public  money  so  de- 
posited with  them  and  for  the  faithful  performance  of  their 
duties  as  financial  agents  of  the  Government.  The  Secretary 
of  the  Treasury  may  accept  as  security  for  the  safe-keeping 
of  public  money  deposited  with  national  banking  associations, 


324  APPENDIX 

as  herein  authorized,  the  deposit  of  bonds  of  the  United  States, 
bonds  or  other  interest-bearing  obligations  of  any  State  of 
the  United  States,  or  any  legally  authorized  bonds  issued  for 
municipal  purposes  by  any  city  in  the  United  States  which  has 
been  in  existence  as  a  city  for  a  period  of  twenty-five  years,  and 
which  for  a  period  of  ten  years  previous  to  such  deposit  has 
not  defaulted  in  the  payment  of  any  part  of  either  principal 
or  interest  of  any  debt  authorized  to  be  contracted  by  it,  and 
which  has  at  such  date  more  than  fifty  thousand  inhabitants  as 
established  by  the  last  national  census,  and  whose  net  indebted- 
ness does  not  exceed  lo  per  centum  of  the  valuation  of  the 
taxable  property  therein,  to  be  ascertained  by  the  last  pre- 
ceding valuation  of  property  for  the  assessment  of  taxes;  or 
the  first-mortgage  bonds,  not  including  street  railway  bonds, 
of  any  railroad  company  which  has  paid  dividends  of  not  less 
than  4  per  centum  per  annum  regularly  and  continuously 
on  its  entire  capital  stock  for  a  period  of  not  less  than  ten  years 
previous  to  the  deposit  of  the  bonds.  The  Secretary  of  the 
Treasury  may  accept  the  securities  herein  enumerated  in  such 
proportions  as  he  may  from  time  to  time  determine,  and  he 
may  at  any  time  require  the  deposit  of  additional  securities, 
or  require  any  depository  to  change  the  character  of  the  securi- 
ties already  on  deposit.  National  banking  associations  having 
on  deposit  pubUc  money  shall  pay  to  the  United  States  for  the 
use  thereof  interest  at  the  rate  of  not  less  than  one  and  one- 
half  per  centum  per  annum,  such  rate  to  be  fixed  from  time 
to  time  by  the  Secretary  of  the  Treasury ;  and  all  public  moneys 
in  any  depository  shall  be  payable  on  demand  upon  the  draft 
of  the  Treasurer  of  the  United  States.  The  United  States 
shall  have  a  lien  on  the  current  assets  of  banks  in  which  public 
moneys  are  deposited  for  the  repayment  of  the  same  on  de- 
mand of  the  Treasurer  of  the  United  States  as  afore:iaid;  but 
the  securities  deposited  with  the  Secretary  of  the  Treasury  for 
the  safe-keeping  of  such  moneys  shall  be  sold  before  the  said 
lien  is  enforced  and  the  proceeds  applied  to  the  discharge  of 
said  lien  to  the  extent  of  the  proceeds  of  sale :  Provided,  That 
no  reserve  shall  be  required  on  account  of  such  deposits." 


APPENDIX  325 

FOWLER  BILL 

February  26,  1903 
Be  it  enacted,  etc. ;  .  .  .  . 

That  any  national  bank  may,  with  the  approval  of  the 
Comptroller  of  the  Currency,  take  out  for  issue  and  circulation 
an  amount  of  national-bank  notes  not  exceeding  25  per  centum 
of  its  paid-up  and  unimpaired  capital  without  depositing 
United  States  bonds  with  the  United  States  Treasury  in  the 
manner  provided  by  existing  law. 

Sect.  2.  That  said  national-bank  notes  shall  be  furnished 
by  the  United  States  at  the  expense  of  the  respective  banks 
issuing  them,  and  shall  be  in  the  denominations  of  ten  dollars 
and  multiples  thereof. 

Sect.  3.  That  before  any  national  bank  shall  receive  any 
of  the  bank  notes  referred  to  in  this  Act  it  shall  first  deposit 
in  the  Treasury  of  the  United  States  as  a  guaranty  of  the  pay- 
ment thereof  an  amount  of  United  States  bonds  or  gold  coin, 
or  United  States  notes,  or  in  all  equal  to  5  per  centum  of  the 
amount  of  the  notes  so  taken  out 

Sect.  4.  That  every  national  bank  taking  out  such  notes 
for  issue  and  circulation  shall,  on  the  first  days  of  January  and 
July  of  each  year,  pay  into  the  Treasury  of  the  United  States, 
in  gold  coin,  a  tax  of  one-quarter  of  i  per  centum  upon  the 
average  amount  of  such  notes  in  actual  circulation  during  the 
preceding  six  months,  and  the  tax  so  paid  into  the  Treasury 
shall,  with  the  5  per  centum  deposited  as  a  guaranty  for  the 
payment  of  the  notes,  constitute  a  guaranty  fund. 

Sect.  5.  That  such  notes  shall  be  a  paramount  lien  upon 
the  assets  of  the  respective  banks  issuing  them 

Sect.  6.  That  any  national  bank  having  notes  outstand- 
ing in  excess  of  75  per  centum  of  its  paid-up  capital,  to  secure 
the  payment  of  which  United  States  bonds  have  been  deposited, 
may,  upon  the  deposit  of  lawful  money  for  the  redemption  of 
such  excess,  take  out  for  circulation  the  notes  provided  for  in 
this  Act,  without  reference  to  the  limitation  of  $3,000,000  each 


326  APPENDIX 

month  prescribed  in  Section  9  of  the  Act  approved  July 
twelfth,  eighteen  hundred  and  eighty-two. 

Sect.  7.  That  the  provisions  of  the  law  contained  in  Section 
9  of  the  Act  approved  July  twelfth,  eighteen  hundred  and 
eighty-two,  Hmiting  the  amount  of  notes  that  may  be  retired 
to  $3,000,000  in  any  calendar  month,  shall  not  apply  to  the 
notes  taken  out  in  accordance  with  the  provisions  of  this  Act. 

Sect.  8.  That  every  national  bank  taking  out  such  notes 
for  issue  shall  maintain  at  all  times  the  same  reserve  against 
such  notes  when  in  actual  circulation  as  is  now  prescribed  by 
law  for  deposits 

Sect.  12.  That  upon  the  failure  of  a  national  bank  any 
national-bank  notes  that  have  been  taken  out  by  it  in  accord- 
ance with  the  provisions  of  this  Act  shall,  upon  presentation 
to  the  United  States  Treasury,  be  paid  in  gold  coin  out  of  the 
guaranty  fund;  but  the  United  States  Treasury  shall  recover 
from  the  assets  of  the  failed  bank  an  amount  equal  to  its  out- 
standing notes,  and  the  same  shall  be  paid  into  the  guaranty 
fund 

Sect.  15.  That  in  addition  to  the  provisions  of  Section  5153 
of  the  Revised  Statutes,  concerning  the  designation  of  public 
depositaries  and  the  deposit  of  public  moneys  therein,  the 
Secretary  of  the  Treasury  may  also  deposit  in  such  designated 
depositaries  any  public  money  received  from  whatever  source, 
including  receipts  from  customs,  without  requiring  security 
by  the  deposit  of  United  States  bonds  and  otherwise,  as  pro- 
vided in  said  section,  but  no  such  deposit  shall  in  any  case 
exceed  75  per  centum  of  the  paid-up  and  unimpaired  capital 
of  any  such  depositary.  National  banking  associations  hav- 
ing on  deposit  public  money  in  accordance  with  the  provisions 
of  this  Act  shall  pay  to  the  United  States  for  the  use  thereof 
interest  at  the  rate  of  two  per  centum  per  annum,  payable 
semi-annually  on  the  first  days  of  January  and  July  of  each 
year.  The  United  States  shall  have  a  paramount  lien  on  the 
assets  of  banks  in  which  public  moneys  are  deposited  in  ac- 
cordance with  the  provisions  of  this  Act  for  the  repayment  of  the 
same  on  demand  of  the  Treasurer  of  the  United  States.  .  .  . 


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